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Form 10-K AUDIENCE INC For: Dec 31

March 9, 2015 5:10 PM EDT
Table of Contents
Index to Financial Statements

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-K

 

 

(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the year ended December 31, 2014

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number: 001-35528

 

 

AUDIENCE, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   91-2061537

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

331 Fairchild Drive

Mountain View, California

  94043
(Address of principal executive offices)   (Zip Code)

(650) 254-2800

Registrant’s telephone number, including area code:

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Common Stock, $.001 Par Value  

The NASDAQ Stock Market LLC

(The NASDAQ Global Select Market)

Securities registered pursuant to Section 12(g) of the Act:

None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of June 30, 2014 was approximately $172.3 million based upon the closing price reported for such date on The NASDAQ Global Select Market. For purposes of this disclosure, shares of common stock held by officers and directors of the registrant and persons that may be deemed to be affiliates under the Act have been excluded. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of outstanding shares of the Registrant’s common stock, $.001 par value, was 23,390,281 as of February 27, 2015.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information is incorporated into Part III of this report by reference to the registrant’s definitive Proxy Statement for the 2015 annual meeting of stockholders where indicated. Such Proxy Statement will be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the year covered by this Form 10-K.

 

 

 


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Index to Financial Statements

AUDIENCE, INC.

Fiscal Year 2014

Form 10-K

 

 

TABLE OF CONTENTS

 

PART I

Item 1.

Business   2   

Item 1A.

Risk Factors   16   

Item 1B.

Unresolved Staff Comments   42   

Item 2.

Properties   42   

Item 3.

Legal Proceedings   42   

Item 4.

Mine Safety Disclosures   42   
PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

  43   

Item 6.

Selected Financial Data   44   

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  47   

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk   68   

Item 8.

Financial Statements and Supplementary Data   68   

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

  68   

Item 9A.

Controls and Procedures   68   

Item 9B.

Other Information   69   
PART III

Item 10.

Directors, Executive Officers and Corporate Governance   70   

Item 11.

Executive Compensation   70   

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

  70   

Item 13.

Certain Relationships and Related Transactions, and Director Independence   70   

Item 14.

Principal Accounting Fees and Services   70   
PART IV

Item 15.

Exhibits and Financial Statement Schedules   71   

SIGNATURES

  74   

 

 


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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

The following Annual Report on Form 10-K (this “Annual Report”) should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report and with management’s discussion and analysis of our financial condition and results of operations included herein.

This Annual Report includes a number of forward-looking statements that involve many risks and uncertainties. Forward-looking statements are identified by the use of the words “would,” “could,” “will,” “may,” “expect,” “believe,” “should,” “anticipate,” “outlook,” “if,” “future,” “intend,” “plan,” “estimate,” “predict,” “potential,” “targets,” “seek” or “continue” and similar words and phrases, including the negatives of these terms, or other variations of these terms, that denote future events. These statements reflect our current views with respect to future events and our potential financial performance and are subject to risks and uncertainties that could cause our actual results and financial position to differ materially and adversely from what is projected or implied in any forward-looking statements included in this Annual Report. These factors include, but are not limited to, the risks described under Item 1A of Part I – “Risk factors,” Item 7 of Part II – “Management’s discussion and analysis of financial condition and results of operations,” elsewhere in this Annual Report on Form 10-K and those discussed in other documents we file with the Securities and Exchange Commission (the “SEC”). We make these forward-looking statements based upon information available on the date of this Annual Report and we have no obligation (and expressly disclaim any such obligation) to update or alter any forward-looking statements, whether as a result of new information or otherwise except as otherwise required by securities regulations.

As used herein, “Audience,” “we,” “us” and “our” refer to Audience, Inc. and its consolidated subsidiaries.

 

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PART I

 

Item 1. Business

Business overview

Audience is a leading provider of intelligent voice and audio solutions that improve voice quality and the user experience in mobile devices. Our technologies, based on auditory neuroscience, improve the mobile voice experience and enhance speech-based services as well as audio quality for multimedia. We collaborate with leading auditory neuroscientists to understand the human auditory system and have developed purpose-built processors that combine science and technology to function like human hearing. Our low power, hardware-accelerated digital signal processors (“DSPs”) and audio codecs and associated algorithms substantially improve sound quality and suppress noise in mobile devices. As the primary driver of the mobile device market, the mobile phone continues to play an increasingly prominent role in peoples’ lives. Voice communication is a primary function of mobile phones, and we expect voice to increasingly complement touch as a core user interface, heightening the importance of voice and audio quality in mobile devices.

The human auditory system is remarkable for its ability to isolate individual sources within a complex sound mixture, which we refer to as auditory intelligence. We have incorporated this auditory intelligence into an intelligent platform by employing computational auditory scene analysis (“CASA”), a scientific discipline dedicated to mapping the sound separation functions in human hearing, into a computational framework. This approach enables our products to intelligently characterize, group and isolate sounds to improve sound quality while suppressing noise. We believe that our approach addresses the challenge of providing clear and consistent voice and audio quality more effectively than other available solutions. We also believe that our highly scalable platform will enable us to create and drive differentiated user experiences, such as robust speech recognition and high-quality audio for mobile video communication.

On July 11, 2014, we acquired Sensor Platforms, Inc., a Delaware corporation (“Sensor Platforms”). Sensor Platforms develops software and algorithms that interpret sensor data to enable broad context awareness on smart phones, wearables and other consumer devices. We believe that the combination of Sensor Platforms’ motion sensing technology with our voice and audio solutions places our combined company in a unique position to deliver compelling solutions based on the fusion of voice and motion. The first product to come out of this acquisition is the MotionQ Library, a software platform that includes advanced algorithms, power conscious architecture, and a high-level application programming interface (“API”).

Our platform consists of our proprietary, purpose-built DSPs and audio codecs, analog and mixed signal circuits and algorithms for voice isolation and noise suppression. We work with original equipment manufacturers (“OEMs”) to have our voice and audio processors and, more recently, software, designed into their products, which we refer to as design wins. We generally sell our voice and audio processors directly to OEMs and their contract manufacturers (“CMs”) on a purchase order basis. We also sell a small portion of our products indirectly to OEMs through distributors. For a single OEM, we also license semiconductor intellectual property (“processor IP”), which that OEM has integrated into certain of its mobile phones, and we began to recognize royalty revenue for the use of our processor IP from this OEM in 2012. In addition, we currently license software that interprets sensor data related to the motion of mobile devices and have announced our first stand-alone software product that improves sound quality and suppresses background noise. Our OEMs’ products are complex and require significant time to design, launch and ramp to volume production. As a result, our sales cycle is lengthy. We typically commence commercial shipments of our products up to one year following a design win. Because the sales cycle for our products is long, we incur expenses to develop and sell our products, regardless of whether we achieve a design win and well in advance of generating revenue, if any. In addition, achieving a design win from an OEM does not ensure that the OEM will begin producing the related product in a timely manner, if at all, or that the design win will ultimately generate additional revenue for us.

We were founded in 2000 and initially targeted the rapidly growing mobile device market, with our primary focus on mobile phones. We began production shipments in 2008 and, as of December 31, 2014, had sold over

 

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500 million processors to our OEM customers. In addition to the mobile device market, we believe that our voice and audio technology is applicable to a broad range of other market segments, including automobile infotainment systems, digital televisions and their remotes, headsets and set top boxes and their remotes. We outsource the manufacture of our voice and audio processors to independent foundries and use third parties for assembly, packaging, test and logistics.

We had total revenue of $ 113.3 million, $160.1 million and $143.9 million for 2014, 2013 and 2012, respectively. We had a net loss of $ 73.6 million for 2014 and net income of $2.1 million and $15.6 million for 2013 and 2012, respectively.

Historically, our revenue has been significantly concentrated in a small number of OEMs, CMs and distributors and we expect that concentration to continue for the foreseeable future. Samsung Electronics Co., Ltd. (“Samsung”) represented 75%, 63% and 48% of our total revenue in 2014, 2013 and 2012, respectively. Comtech International, Ltd. (“Comtech”), a distributor that sells our products to end customers, such as Xiaomi, Inc. (“Xiaomi”), represented 11% of our total revenue in each of 2014 and 2013. In 2014, 2013 and 2012, one of our largest OEMs, Apple Inc. (“Apple”) and its CMs, Foxconn International Holdings, Ltd. and its affiliates (collectively “Foxconn”) and Protek (Shanghai) Limited and its affiliates (collectively, “Protek”), represented 8%, 21% and 46% of our total revenue, respectively. Our total revenue from Apple and its CMs declined during 2014 and is expected to decline further in the future as end users’ focus on Apple’s newer model mobile phones, and the earlier models in which our processors or processor IP are included, decline in sales or become obsolete and are no longer produced.

We anticipate that our operating results will continue to fluctuate and be subject to consumer demand for high-end smart phones and anticipate that reductions in demand by our large OEM customers will continue to have a disproportionate impact on our future results.

Industry overview

Mobile devices are ubiquitous today and play an increasingly prominent role in peoples’ lives. However, since the introduction of mobile phones, due to network and device limitations, voice quality has not improved significantly. For example, the sound frequency range used by mobile devices has historically been constrained by narrowband, circuit switched networks, resulting in lower voice quality than in a face-to-face conversation. Mobile devices have historically been unable to adequately separate the user’s voice from background noise. As a result, users have had to tolerate noisy, poor quality voice communication. After years of mobile network infrastructure investments in bandwidth and connectivity, mobile network operators (“MNOs”) have turned their attention to voice and audio quality as a way to improve user experience, satisfaction and loyalty.

The transition from narrowband to wideband communications has produced networks capable of carrying higher quality signals, and the sound quality delivered by these networks is poised for significant improvement. Advanced voice and audio solutions will also enable mobile devices to improve sound quality and enhance the user experience. As users increasingly become aware of these network and device improvements, they are demanding improved voice quality in the devices they depend upon, including smartphones, feature phones, media tablets and laptops. In addition, new applications and functionality, such as voice as a user interface, will require improved voice and audio quality. We expect that OEMs and MNOs will increasingly adopt advanced voice and audio solutions as they seek to differentiate future products and services.

Trends driving demand for high-quality voice and audio solutions in mobile devices

Sound quality is fundamental to the user experience in mobile communications. A variety of trends are driving demand for high-quality voice and audio solutions in mobile devices, including:

Users expect more freedom in how and where they communicate. Users increasingly want to make or take calls with their mobile devices in noisy environments, but they also want to hear and be heard clearly. Users want

 

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a consistent, high-quality voice and audio experience whether conducting a conference call from an airport, video chatting in a cafe, making a call hands-free while driving or capturing and posting multimedia content to a social network page.

Emerging adoption of wideband communications networks. MNOs are migrating the delivery of voice content from narrowband, circuit-switched public networks to more advanced, wideband, packet-switched Internet Protocol networks. Internet Protocol-based coding and transmission enables a much richer voice experience by widening the prior frequency limits on voice transmission.

Users expect high-quality voice and audio in their mobile devices. As MNOs and OEMs promote new wideband networks and more advanced mobile devices in their marketing campaigns, users are learning to expect and seek improved voice and audio quality from those networks and devices.

Increased functionality in mobile devices. OEMs have added new features to mobile devices that were historically found only in stand-alone devices such as music players, video cameras, navigation devices, gaming devices and others. Substantial improvements in voice and audio quality improve the user experience for many of these functions. OEMs are making greater investments in voice and audio quality for multifunction mobile devices.

Increased far-field interaction with mobile devices. An increasing number of applications require far-field use cases, in which the microphone is held farther from the sound source than traditional handset use modes. A common far-field use case is speakerphone mode, which is typically used with applications such as hands-free calling, video call applications and voice search. These and other applications require a combination of speech, touch and visual interaction where the mobile device is held away from the speaker. Far-field uses are more vulnerable to background noise interference and poor voice quality given the speaker’s distance from the device.

Voice is becoming a preferred interface for mobile devices. Voice communication is a fundamental form of human interaction and represents a natural interface for mobile devices. A common use of voice as a mobile device interface is in automobiles, where users are required to comply with hands-free legislation. Similar to the evolution of touch as an interface, speech recognition is expected to be increasingly important, particularly as voice-enabled applications become more prevalent and viable.

Poor-quality audio impacts the High Definition (“HD”) video experience. As HD video content continues to become increasingly prevalent within broadband and broadcast networks, we believe that a high-quality audio user experience will provide a point of substantial differentiation in the experience of consuming media content, and that robust real-time voice and audio processing will play an important role in user satisfaction as HD video capture and playback on mobile devices becomes more common.

 

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Voice and audio subsystem in mobile devices

The voice and audio subsystem in a typical smartphone includes a baseband processor for modulation and transmission of voice and audio signals, an application processor for multimedia-based applications, audio codecs to digitally encode and decode audio signals, as well as acoustic elements such as microphones and speakers. Some mobile devices only incorporate a single microphone as part of the audio subsystem, while more advanced mobile devices use two or more microphone solutions to increase the amount of information available to improve the voice and audio performance of the device. The voice and audio subsystem also includes other analog circuits, such as data converters, amplifiers and mixers, each of which has a specific function along the signal chain.

 

LOGO

Figure 1: Illustrative voice and audio subsystem for a typical smartphone

Innovation in the voice and audio subsystem

Many high-end mobile devices now incorporate voice and audio processors with dedicated processing resources and specialized algorithms to improve user experience. These devices have benefited from the wider adoption of two or more microphone noise suppression solutions. We believe that new audio technology development will continue at a rapid pace, driven by demand for new features, such as always-on voice recognition, as well as further improvements in voice and audio quality.

Industry challenges and our competitive strengths

The mobile environment is noisy and the isolation of voice from background noise is very difficult. Removing background noise while preserving speech quality is challenging. Nonstationary noise, such as voice or music, which constantly changes in both frequency and loudness, is particularly problematic and is especially difficult to remove without affecting speech quality. An effective solution should be able to remove all noise types, in almost all conditions, without harming speech quality. Our proprietary platform offers high-quality

 

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voice and audio performance at low power by leveraging our purpose-built DSPs and algorithms. Our CASA-based architecture scales with compute power and across new applications and use cases. We believe this ability to scale our technology differentiates us from alternative approaches to voice and audio quality. Additionally, the flexibility of our platform’s design interface makes it easy for customers to integrate our products into a wide range of mobile devices.

Implementing high-quality voice and audio solutions on mobile devices is challenging and requires close industry partnerships. Mobile devices are small, thereby limiting any opportunity to spread out or use a large number of microphones to locate the desired voice. The small form factor of mobile devices also makes it difficult to physically separate speakers from microphones to prevent echo. There is typically little or no flexibility to adapt the mobile device form factor to the acoustic needs of a voice processing solution. Cost constraints often compel OEMs to use low cost, commoditized microphones and speakers, which have significant manufacturing variances that impair most multimicrophone solutions. Finally, short design cycles further exacerbate these issues by limiting the window of time to tune device performance for a device’s individual acoustic and electronic characteristics.

We are engaged in various ways with leading MNOs, including AT&T, Inc. (“AT&T”), China Mobile Limited (China Mobile), Orange plc, Sprint Corporation, Telecom Italia SpA, Deutsche Telekom (“T-Mobile”), Verizon Wireless and Vodafone Group plc. We also work closely with OEMs throughout their design processes using our proprietary AuViD graphical design tools to integrate our solutions into their mobile devices, which enables us to improve design efficiency, increase productivity and establish differentiated design relationships with OEMs. We also have a considerable field application engineering team to provide design support capabilities, enabling OEMs to efficiently deploy our solutions across their portfolio.

Our solution

We provide intelligent voice and audio solutions that substantially improve sound quality and suppress noise in mobile devices. We believe that our auditory intelligence approach addresses the challenge of providing clear and consistent voice and audio quality more effectively than other available solutions. Our platform consists of our proprietary, purpose-built DSPs and audio codecs, analog and mixed signal circuits and algorithms for voice isolation and noise suppression. We also currently license software that interprets sensor data related to the motion of mobile devices and have announced our first stand-alone software product that improves sound quality and suppresses background noise.

Benefits to mobile device users

Differentiated voice and audio quality. Our products substantially improve voice quality and reduce background noise on mobile devices wherever they are used.

Consistent voice and audio experience. Our products enable a more consistent voice and audio experience, regardless of the use case or surrounding noise environment.

Robust speech recognition. By combining our high-quality voice isolation capability with third-party speech recognition software, our intelligent voice and audio solutions improve the user experience with speech recognition applications.

Clarity of audio capture and playback. We believe that demand for creating and viewing user-generated content will lead users to select devices that feature differentiated HD audio and video capture.

Benefits to the mobile device ecosystem

Original equipment manufacturers. OEMs can more effectively differentiate their mobile devices by providing a better user experience when our intelligent voice and audio solutions are incorporated into their products. Our solutions also help OEMs’ mobile devices to meet specifications set by MNOs regarding voice and audio quality.

 

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Mobile network operators. By improving the user experience, our processors can increase user demand for mobile communication services, enhance user satisfaction and promote user loyalty. Additionally, our processors’ noise suppression capabilities also have the potential to increase network capacity for MNOs by reducing the transmission of noise.

Mobile operating system providers. Mobile operating system providers benefit from our processors’ ability to intelligently analyze and understand the sound environment in support of speech recognition, multimedia and other applications.

Our technology

We collaborate with leading experts in auditory neuroscience to understand the detailed function of the human auditory pathway, uniquely combining science and technology to model the functions of human hearing. Our architecture combines scientific breakthroughs with DSP hardware acceleration to deliver a solution with the intelligence of human hearing in the size and power constraints of mobile devices.

The human auditory system is remarkable for its ability to identify and isolate individual sources within a complex sound mixture to enable people to hear the desired sound source clearly, which we refer to as auditory intelligence. To effectively manage the separation and identification of individual sounds, the human hearing system evaluates the entire auditory scene based on a variety of characteristics. Employing the science of CASA, our proprietary technology has been designed to intelligently characterize, group, classify the auditory scene and isolate a speaker’s voice from noise.

Our proprietary CASA-based algorithms provide a rich, highly integrated capability we use to deliver leading-edge voice and audio quality solutions. Our platform allows us to create custom, hardware-accelerated DSPs, purpose-built for our algorithms, to provide top performance with low power characteristics. Our core technology has already scaled from basic calls to more difficult voice use cases, such as wideband speakerphone mode. We believe our dedicated approach to voice and audio processing will continue to enable our solutions to scale along with the demands in mobile devices for increased performance and more robust feature sets. Our architecture will allow us to incorporate additional intelligence into our solutions in each of the processing stages, such as adding new characterization cues to enable more refined decision making. We believe that this will enable our solutions to better address new and more challenging use cases and noise conditions as compared to traditional approaches.

The following descriptions and diagram of corresponding stages depict our CASA-based architecture for a DSP.

 

  Fast Cochlea Transform (“FCT”). Our proprietary FCT architecture, based on the human cochlea, transforms incoming sound waves into frequency components in order to map the digital audio stream into a three-dimensional representation of the sound mixture. This approach has significant benefits over the typical method, the Fast Fourier Transform (“FFT”). In particular, it offers much higher spectro-temporal resolution than is possible using FFT, enabling precise characterization and analysis of the auditory scene, similar to the analysis that occurs in the human auditory pathway. Our solutions attain this resolution with low latency, which is necessary for use in real-time communications. This combination of high resolution and low latency is unique to the FCT.

 

  Characterization. During characterization, our solutions identify and compute the acoustic properties of incoming sounds according to fundamental attributes such as pitch, harmonics, spatial location, temporal and other information in the frequency domain. The diversity and precision of our characterization is essential to making intelligent decisions in the grouping stage which follows.

 

 

Grouping. Following characterization, our solutions group the FCT domain components of the sound mixture into individual sources according to a variety of CASA principles, such as common location, onset time and fundamental frequency, as well as timbral consistency. Information from the characterization stage

 

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is simultaneously evaluated in real time, including time alignment, in order to decide which FCT domain energy belongs to which sound source. In this way, individual sound components are grouped to create separate audio streams, which are then tracked independently.

 

  Voice isolation. Once all of the individual sound components have been properly characterized and grouped into discrete streams, the sound source of interest is selected. Importantly, the isolation stage enables the intelligent separation of voice from other components of the sound mixture, eliminating noise and other audio to deliver clear voice and audio to users.

 

  Inverse FCT. As a final stage, the inverse FCT is responsible for reconstructing the FCT data back into high-quality digitized audio for further transmission.

 

LOGO

Figure 2: Stages of our CASA-based architecture

Our products

Our voice and smart sound solutions include our proprietary, purpose-built DSPs and audio codecs, algorithms for voice isolation and noise suppression and our design tools and support capabilities. These processors enable noise suppression and improved sound quality in narrowband and wideband for real-time communications, including Internet Protocol-based communication, speech-based applications and multimedia applications such as audio recording, video recording and voice command web searches.

Our processors provide dedicated computational power for the implementation of our proprietary, CASA-based algorithms. These processors have been optimized for both performance and power and utilize advanced hardware acceleration techniques. Our product portfolio supports both analog and digital interfaces to provide added design flexibility for our customers.

We design our solutions to deliver consistent performance. Incorporating over 10 years of field testing and device data, our solutions deliver improved voice and audio quality and noise suppression in near and far-field modes and at different handset orientations. Our processors deliver noise suppression in real world environments by removing both stationary and nonstationary noise for narrowband and wideband communications.

Key features of our products include:

Real time communication voice quality

 

  Nonstationary noise suppression: Suppression of dynamic distracters, such as background voices or music, characterized by rapid or random changes.

 

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  Transmit and receive: Simultaneous signal processing along both the transmit and receive paths. In the transmit path, the user’s auditory scene is processed before transmission to the listener on the other end. In the receive path, the audio stream from the other end is improved by our solution and then presented to the near end listener.

 

  Near-field and far-field capability: More consistent voice and audio quality wherever the device is held and used.

 

  Narrowband and wideband: Capable of signal processing for both narrowband and wideband signals.

 

  Audience Bandwidth Expansion: Improves narrowband signals by estimating and adding energy at higher sound frequencies to create wideband voice quality and deliver rich, full sound quality.

 

  Acoustic echo cancellation: Cancellation of echo caused by acoustic conditions that redirect sound, such as the acoustic coupling between a mobile device’s speakers and microphones.

 

  Always-on VoiceQ (“VoiceQ”): Enables a device to be in always listening mode, ready to understand and act upon verbal commands without significantly impacting battery life. VoiceQ also includes support for user configurable keywords for personalization and continuous VoiceQ capability, which allows the user to speak naturally, without having to introduce an awkward pause between the prompt and the following command to wake the device. We recently began shipping our processors with this technology.

Automatic speech recognition (“ASR”) assist

 

  ASR assist: Improves accuracy and performance of speech enabled applications in the presence of noise.

Integrated audio codec

 

  Dynamic range: High dynamic range leads to better perceived high fidelity audio quality. The codec integrated with our voice processors provides outputs with high dynamic range that meet stringent audio performance specifications for mobile devices.

 

  Multimedia features: The integration of mixed-signal and DSP components into a single device allows for power-efficient new wideband audio multimedia features.

Multimedia improvement

 

  Parametric equalization: Post-processing of music streams during playback to emulate audio profiles such as rock, classical, jazz and other custom profiles by enhancing specific frequencies in the audio stream.

 

  Stereo widening: Improvement of music playback over headphones or stereo loudspeakers by expanding the perceived spatial separation of different sounds.

Our voice and audio solutions

We offer custom voice and audio processors, some with integrated smart audio codecs for device platforms including smartphones, feature phones and media tablets. These processors are accompanied by our integration tools and support. We offer the following processors:

 

    eS305: Second generation voice and audio processor utilizing new hardware acceleration architecture and algorithms for far-field, wideband communications and capable of advanced speech recognition assist; uses an all-digital interface.

 

    eS325: Third generation voice and audio processor that features simultaneous three microphone processing, optimized ASR and bandwidth expansion technology for consistent voice call experience when moving between 3G and 4G networks.

 

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    eS70x: Fourth generation family of advanced voice and audio products, the eS70x Series delivers a range of innovations in speech, voice and multimedia audio processing and introduces new features such as wind noise suppression, full band (48 kHz) voice processing, and VoiceQ, a voice sensing technology that enables dependable continuous voice detection and actuation. This product family also delivers improved performance across a number of key voice and audio technologies including third generation ASR Assist, a leading-edge noise suppression performance, bandwidth expansion (“BWE”), improved acoustic echo cancellation (“AEC”), and audio playback enhancements such as equalization, multi-band compression and virtual bass boost.

 

    eS75x: The eS75x family of products combines the eS70x advanced voice and audio processing capabilities with a high performance mixed-signal audio sub-system consisting of a multi-channel audio codec with integrated headphone, earpiece and speaker amplifiers, resulting in a fully integrated audio hub solution.

 

    eS804 and eS854: The eS804 is a stand-alone advanced digital voice processor while the eS854 combines the 800 series digital voice processor with analog circuits creating our smart audio codec. Both products in the eS800 series support devices that demand far-field capabilities, where voice interface needs to work at distances up to five meters. A new “barge-in” capability has been added that allows voice recognition to work during media playback without interruption, as well as voice compass, a new feature that recognizes the position of the speaker relative to the device to improve speakerphone usage. The eS800 series also features improvements to VoiceQ with improved accuracy for user trained keywords resulting in less false wake-ups. Several voice quality improvements for handset usage have also been made, including: new noise suppression algorithms based on machine learning techniques, signal-to-noise ratio improvements enabling clear calls in challenging environments, and improved positional robustness for natural and smoother sounding voice quality when holding the device in almost any position. The eS804 and eS854 processors are expected to sample to key phone manufacturers in the first quarter of 2015.

We also offer the following software solutions:

 

    Audience S1.0: Audience S1.0 delivers improved experiences for voice over Internet Protocol (VoIP) calling, voice search, voice commands and other voice controlled applications run on personal computers, tablets and all-in-one devices. It delivers wideband noise suppression, which can enable clear VoIP calls in nearly any environment. In addition, acoustic echo cancelation and de-reverberation can significantly reduce double-talk and echo effects in larger, resonant spaces. Audience S1.0 also performs intelligent key-click removal which suppresses the keystroke noise effectively during both quiet pauses and speech. Our 360°Voice allows users to conduct conference calls where all participants can be heard clearly, regardless of their position in relation to the microphones. This superior positional robustness gives the OEM flexibility in microphone placement, enabling lower production costs and reducing limitations on a device’s industrial design. Audience S1.0 is based on our fourth generation advanced voice technology and third generation ASR Assist technology. Based on the Intel automatic speech recognition specification, tests show performance to be superior to competitive beamforming solutions when tested in conditions where the user’s location varies in relation to the microphones.

 

    MotionQ Library: MotionQ library is a software platform that includes advanced algorithms, power conscious architecture, and a high-level API. The library is optimized for mobile consumer electronic devices and can run in an application processor, a sensor hub, or be distributed over multiple processors. The foundation of the MotionQ library is its “sensor fusion.”, an algorithmic technique of combining the outputs from two or more sensors, recording a common event, so that the fused result captures the event better than any single constituent input. Our sensor fusion capability combines active sensor power management with improved ability to mitigate magnetic anomalies. The MotionQ library also provides applications with “context awareness,” which involves another layer of sophisticated algorithms on top of sensor fusion that interprets sensor data to deduce higher-level information. These algorithms distill a context (such as, “the user is running”) from a series of characteristic features collected by the sensor data.

 

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Integration tools and support: We provide OEMs with our AuViD graphical design tools enabling them to efficiently integrate and customize the features of our voice and audio processors across a multitude of device designs. These tools feature an easy-to-use visual design interface and facilitate rapid and cost-effective design integration. Our applications and technical sales engineers work closely with OEMs to provide design support from device concept through field testing.

Customers

We derive our revenue primarily from the sale of our voice and audio processors to OEMs which incorporate them into mobile devices. We currently have design wins for our voice and audio processors to OEMs in the United States and Asia. As of December 31, 2014, OEMs, CMs and distributors worldwide had purchased more than 500 million of our processors and incorporated them in over 220 mobile device models that have reached commercial production. In 2014, 2013 and 2012, sales to CMs and OEMs with manufacturing operations and distributors in Asia represented substantially all of our hardware revenue. Commencing in the first quarter of 2012, we began recording licensing revenue on royalty payments that is attributed to one OEM’s headquarters location, which is in the United States. For 2014, sales to CMs and OEMs in Asia and the United States accounted for 91% and 9% of our total revenue, respectively. For 2013, sales to CMs and OEMs in Asia and the United States accounted for 93% and 7% of our total revenue, respectively. For 2012, sales to CMs and OEMs in Asia and the United States accounted for 72% and 28% of our total revenue, respectively.

OEMs design in our products and either procure them directly from us or indirectly through CMs or distributors. OEMs and their CMs and distributors generally purchase our voice and audio processors on a purchase order basis and do not enter into long-term contracts or have minimum purchase commitments with us that would obligate them to purchase additional products from us in the future. For example, we do not have a long term supply contract with Samsung, which was our largest customer in 2014, or Comtech, which was one of our largest distributors in 2014.

Since we began generating revenue in 2008, Apple, through its CMs, Foxconn and Protek, HTC, LG, Motorola, Pantech, Samsung, Sharp, Sony, Meizu, Huawei, Yulong, Xiaomi and ZTE have incorporated our products into certain smartphones and feature phones, and, in the case of HTC, Samsung, Sony, Acer and Google media tablets. In 2014, revenue from Samsung and Comtech accounted for 75% and 11% of our total revenue, respectively In 2013, revenue from Samsung, Apple and Comtech, a distributor, accounted for 63%, 21% and 11% of our total revenue, respectively. In 2012, revenue from Samsung, Apple and Foxconn accounted for 48%, 27% and 14% of our total revenue, respectively. No other OEM, CM or distributor accounted for 10% or more of our total revenue in 2014, 2013 or 2012. We expect that our relationship with Samsung will continue to account for a substantial portion of our total revenue for 2015.

Sales and marketing

We sell our voice and audio processors to OEMs and their CMs through a direct sales force aided in certain regions by third-party sales representatives. For some OEMs, distributors purchase processors from us to fulfill the OEMs’ orders. We maintain sales operations, which include our direct sales force, third-party sales representatives and distributors, in Asia, North America, Japan and Europe. Substantially all of our revenue has been generated by sales to CMs and OEMs that manufacture their products in Asia. We expect sales to CMs and OEMs in Asia to contribute a majority of our revenue for the foreseeable future. As of December 31, 2014, we had 84 employees in sales and marketing, including our application engineers and technical sales people, located in North America, Asia and Europe.

Our direct sales force focuses on securing design wins to incorporate our processors and software in OEMs’ mobile devices. We work directly with OEMs to create awareness of our product offerings and provide design and integration support.

 

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We have also worked with MNOs to educate them about factors contributing to voice and audio quality in order to enable them to further improve customer satisfaction. We work with MNOs to encourage OEMs to incorporate intelligent voice and audio solutions in their products.

Manufacturing and operations

We operate a fabless business model and outsource the manufacturing of our voice and audio processors. Manufacturing includes the fabrication of integrated circuits, assembly, packaging and test. We currently rely on Taiwan Semiconductor Manufacturing Company Ltd. (“TSMC”) to produce most of our voice and audio processors at three of its fabrication facilities in Taiwan. We have also engaged GLOBALFOUNDRIES Inc. (“Globalfoundries”) to produce some of our voice and audio processors at its fabrication facilities and have begun commercial production at these locations. In addition, we rely on third parties, such as Signetics Corporation (“Signetics”), Amkor Technologies, Inc. (“Amkor”) and STATSChipPAC Ltd. (“STATSChipPAC”), for assembly, packaging and test, and other contractors for logistics. We do not have any long-term supply agreements with our foundries or our assembly, packaging, test and logistics vendors. This outsourced manufacturing approach allows us to focus our resources on the design, sale and marketing of our products. In addition, we believe that outsourcing our manufacturing provides us the flexibility needed to respond to variations in customer demand, simplifies our operations and significantly reduces our capital requirements.

Competition

The market for mobile device components is highly competitive and we expect competition to intensify in the future. There are a number of components in the voice and audio subsystem of a mobile device including baseband processors, audio codecs and voice and audio processors. Currently, we provide voice and audio processors and have begun providing audio codecs to compete in the mobile device component market. We have also started to offer software solutions for motion sensing, such as MotionQ, and voice quality, such as Audience S1.0, and in the future, we may elect to expand our offerings to include other subsystem components. As such, we are and, in the future may continue to compete against companies offering those subsystem components. Companies that currently compete for sales of other mobile device components may enter the voice and audio processor market with stand-alone components or components with other functionalities and compete with us.

We currently face, or expect to face, competition from a number of companies that produce components or software for the mobile device audio subsystem, or provide motion sensor solutions. We also face competition from smaller, privately held companies and could face competition from new market entrants, whether from new ventures or from established companies moving into the areas of voice and audio subsystems that our products address.

We also compete against solutions internally developed by OEMs, as well as third-party software and hardware systems. OEMs may seek to reduce the number of processors in their mobile devices and incorporate the functionality of our voice and audio processors into other hardware or software components of their mobile devices. OEMs may internally develop or rely on third-party suppliers to provide central processing units, codecs or other components of their mobile devices that combine multiple functionalities, including those provided by our processors, which could reduce the demand for our processors and adversely impact our business, financial condition, operating results and cash flows.

Our ability to compete effectively depends on a number of factors, including:

 

  our ability to attract, retain and support OEMs and to establish and maintain relationships with MNOs;

 

  our ability to recruit and retain engineering, sales and marketing personnel;

 

  our processors’ scalability, performance, quality, ease of use and cost effectiveness relative to those of our competitors’ products;

 

  our success in developing and creating demand for new and proprietary technologies to offer products and features previously not available in the marketplace;

 

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  our success in identifying new markets, applications and technologies;

 

  our products’ interoperability with various data access protocols and other voice and audio subsystem components of mobile devices;

 

  our ability to continue to establish greater name recognition and build upon our reputation in the industry;

 

  our ability to respond effectively to aggressive business tactics by our competitors, including selling at lower prices or asserting intellectual property rights irrespective of the validity of the claims; and

 

  our ability to protect our intellectual property.

With respect to these factors, based on publicly available data, we believe that we compete favorably on performance, scalability and cost.

Research and development

Since our inception we have made substantial investments in research and development. We have research and development facilities in Mountain View, California, Scotts Valley, California, Lafayette, Colorado and Bangalore, India. As of December 31, 2014, we had 181 employees in research and development. Our focus is to further develop our current voice and audio processors and audio codecs, develop new processors and software products that achieve market acceptance, maintain technological competitiveness and meet an expanding range of mobile device requirements. Our team includes leading innovators in CASA, speech analysis and coding, spatial audio and acoustics, and motion algorithms, among other disciplines.

Our total expenses for research and development for 2014, 2013 and 2012 were $50.6 million, $43.3 million and $31.5 million, respectively.

Intellectual property

Our success depends in part upon our ability to develop and protect our core technology and intellectual property. We rely primarily on a combination of trade secret, patent, copyright and trademark laws, as well as contractual provisions with employees and third parties, to establish and protect our intellectual property rights. Our products are provided to OEM customers pursuant to agreements that impose restrictions on use and disclosure. Our agreements with employees and contractors who participate in the development of our core technology and intellectual property include provisions that assign intellectual property rights to us. In addition to the foregoing protections, we generally control access to our proprietary and confidential information through the use of internal and external controls.

As of December 31, 2014, we held 68 issued United States (“U.S.”) patents expiring between July 2019 and July 2033 and also had 127 U.S. patent applications pending. As of December 31, 2014, we also had 47 pending foreign patent applications and 12 foreign patents issued. Each of the foreign patent applications is related to a U.S. patent or a pending U.S. patent application. Pending patent applications may receive unfavorable examination and are not guaranteed allowance as issued patents. We may elect to amend, abandon, or otherwise not pursue prosecution of certain pending patent applications or of certain inventions disclosed in those patent applications due to patent examination results, strategic concerns, economic considerations or other factors. To the extent that a patent is issued, any such issued patent may be contested, circumvented, found unenforceable or invalidated and we may be unwilling or unable to prevent third parties from infringing a particular patent. Moreover, we cannot assure you that we can successfully use our patents to prevent competitors from copying our products or developing competing technologies. We will continue to assess appropriate occasions to seek patent protection for aspects of our technology that we believe provide us a significant competitive advantage in the market.

As of December 31, 2014, we have the trademarks for “AUDIENCE,” “EARSMART,” earSmart Logo, “THE WORLD’S MOST INTELLIGENT VOICE PROCESSOR,” and “HEAR AND BE HEARD” registered in

 

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the U.S. We have the trademark for “AUDIENCE,” “EARSMART,” earSmart Logo, and “HEAR AND BE HEARD” registered in the European Union (“EU”), Japan, and South Korea. We have the trademark for “EARSMART” and earSmart Logo registered in China and the trademark “AUDIENCE” pending protection in China. We also have “AUDIENCE,” “EARSMART,” and earSmart Logo registered in Taiwan, and the EARSMART COMPOSITE MARK registered in South Korea. We have pending trademark applications for “AUDIENCE,” “EARSMART,” and earSmart Logo in India. In addition, we have pending trademark applications for “MOTIONQ,” “VOICEQ,” and “NUE” in the U.S. and for “NUE” in China, EU, India, Japan, South Korea, and Taiwan.

Employees

As of December 31, 2014, we had 319 employees in offices across North America, Asia and Europe including 84 employees in sales and marketing, 181 in research and development, 18 in manufacturing and operations and 36 in general and administration. We consider our current relationship with our employees to be good. None of our employees are represented by labor unions or have collective bargaining agreements.

Information about Segment and Geographic Revenue

We operate in one reportable segment related to the selling and marketing of voice and audio processors and licensing of processor IP for use in mobile devices. We have identified our president and chief executive officer as the Chief Operating Decision Maker (“CODM”) who manages our operations on a consolidated basis for purposes of allocating resources. When evaluating financial performance, the CODM reviews individual customer and product information, while other financial information is reviewed on a consolidated basis.

Substantially all of our revenue was generated from the sale of our products to CMs and OEMs whose primary manufacturing operations and distributors are in Asia. See Note 14 to our consolidated financial statements included in this Annual Report for additional information.

CORPORATE INFORMATION

We were founded in July 2000 in California under the name Applied Neurosystems Corporation, and we changed our name to Audience, Inc. in June 2002. In June 2011, we reincorporated as a Delaware corporation under the name Audience, Inc. On May 15, 2012, we made our initial public offering (“IPO”) and listed common stock on the NASDAQ Global Select Market under the symbol “ADNC.”

Our principal executive office is located at 331 Fairchild Drive, Mountain View, California 94043. Our telephone number is (650) 254-2800. Our website address is www.audience.com. Information contained on, or that can be accessed through, our website is not incorporated by reference into this Annual Report.

On July 11, 2014, we acquired Sensor Platforms for approximately $41 million. Sensor Platforms develops software and algorithms that interpret sensor data to enable broad context awareness on smart phones, wearables and other consumer devices. For additional details relating to this acquisition, please see Note 5 to our consolidated financial statements included in this Annual Report.

We file reports with the SEC including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any other filings required by the SEC. We make available on our Investor Relations website, free of charge, our public filings with the SEC, and any amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The information on our website is not incorporated by reference into this Annual Report or in any other report or document we file with the SEC.

 

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The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

In April 2012, the Jumpstart Our Business Startups Act (the “JOBS Act”) was enacted. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”) for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We are electing to delay such adoption of new or revised accounting standards, and as a result, we may not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for other companies.

Subject to certain conditions set forth in the JOBS Act, as an emerging growth company, we intend to rely on certain of these exemptions, including without limitation, providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404 and complying with any requirement that may be adopted regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis). These exemptions will no longer apply upon the earliest of (i) January 1, 2018, (ii) the first fiscal year after our annual gross revenues are $1.0 billion or more, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities or (iv) as of the end of any fiscal year in which the market value of our common stock that is held by non-affiliates exceeds $700 million as of the end of the second quarter of that fiscal year.

 

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ITEM 1A. Risk Factors

We operate in a rapidly changing environment that involves numerous uncertainties and risks. The following risks and uncertainties may have a material and adverse effect on our business, financial condition, operating results and cash flows. You should consider these risks and uncertainties carefully, together with all of the other information included or incorporated by reference in this Annual Report on Form 10-K. If any of the risks or uncertainties we face were to occur, the trading price of our securities could decline and you may lose all or part of your investment.

Risks related to our business and industry

We depend on Samsung for the majority of our revenue and the loss of, or a significant reduction in orders from, Samsung would adversely affect our revenue and significantly harm our business, financial condition, operating results and cash flows.

For 2014 and 2013, Samsung accounted for 75% and 63% of our total revenue, respectively, and we anticipate that Samsung will continue to represent a majority of our revenue at least through the end of 2015. Samsung may purchase fewer of our voice and audio processors than it did in the past, alter its purchasing patterns, modify the terms on which it purchases our products, or decide not to purchase our products at all. In addition, our revenue is dependent upon consumer acceptance of and demand for Samsung’s high-end smart phones, in which our products are incorporated. Samsung announced in July 2014 that it expected demand for its high-end smart phones to be weak in the third quarter of 2014 and later announced in October 2014 that its third quarter earnings decreased substantially as a result of declining phone sales due to increased smart phone competition. If Samsung continues to experience declining sales of its smart phones which include our processors, our business, financial condition, operating results and cash flows would be significantly harmed. We generally operate under purchase orders from Samsung and do not have a master supply agreement with this OEM. We renegotiate prices with Samsung periodically and our revenue and gross margins may fluctuate as a result. Samsung is not obligated to continue to purchase processors from us. Samsung may seek second sources or decide to replace our processors with other hardware, software or lower cost solutions. If we fail to achieve design wins for global platforms at Samsung, our future revenue and profitability may be harmed.

We depend on a small number of OEMs for a substantial majority of our revenue and the loss of, or a significant reduction in orders from, one or more of our OEMs could adversely affect our revenue and significantly harm our business, financial condition, operating results and cash flows.

We derive a substantial majority of our revenue from sales to a small number of OEMs. For 2014, Samsung and Comtech, a distributor that sells our products to end customers, such as Xiaomi, accounted for 75% and 11% of our total revenues. We expect this concentration in a small number of OEMs and distributors to continue during 2015. We may be unable to secure future design wins from these OEMs as they develop and introduce new products and, even if we do, existing OEM product sales may decline and new mobile devices introduced by our current OEMs may not achieve widespread market acceptance or be produced in large number. We cannot assure you that we will be able to sustain our revenue from our existing OEMs. For example, we expect our licensing revenue on royalty payments from Apple to substantially decline as this OEM phases out older generations of mobile phones in which our processor IP had been included.

Our OEMs typically buy our processors on a purchase order basis and do not enter into long-term contracts or minimum purchase commitments that would obligate them to continue to buy additional processors from us in the future. For example, we announced in August 2013, July 2014 and October 2014 that weakness in demand for certain high-end smart phones was anticipated to cause a decline in the volume of processors purchased from us by our largest OEM and as a result, we had excess inventory for which we recorded reserves.

Although we seek to grow our OEM base through new design wins, our sales and development cycle to obtain initial design wins from new OEMs is long and is subject to uncertainties, and we cannot assure you that we will be successful in doing so. Even if we are successful in obtaining design wins with new OEMs, our

 

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existing OEM customers may continue to account for a substantial portion of our sales in the future. Although an OEM may design us into a particular device, we endeavor to win design slots in other devices, including the next generation devices and may not be able to do so. Because the commercial life of smart phones is relatively limited, we have limited ability to predict whether a given OEM will continue to use our processors. If we are unable to generate repeat business from our existing OEMs, generate revenue from new OEMs or expand into broader markets, our operating results would be adversely affected. If one or more of our existing OEMs were to decide not to use our processors or processor IP, that decision could harm our brand and impair our ability to maintain or extend our relationships with our other OEMs or establish new OEM relationships. In addition, if concentration in the mobile phone industry or the smartphone market segment increases, we may be unable to diversify our revenue base, which could significantly harm our business, financial condition, operating results and cash flows.

Decreased purchases by large OEM customers, whether for current or future mobile device models in which our products were included or otherwise, changes in their purchasing patterns, modification of terms or a disruption or termination of our relationships with these OEMs could adversely affect our revenue and significantly harm our business, financial condition, operating results and cash flows. For example, due to weakness in demand for certain high-end smart phones we experienced a significant decline in the quarters ended September 30, 2014 and December 31, 2014. Decreased purchases by large OEM customers could also cause significant fluctuations in our results of operations because we have significant fixed expenses in the short term and may not be able to reduce expenses in a timely manner to offset such a short-fall. In addition, our sales and development cycle to obtain new design wins and new OEMs is long.

Although we are reliant on a small number of OEMs for our revenue in any period, the identity of those OEMs may change depending on the timing of their mobile device releases, seasonal user purchasing patterns and launch dates set by MNOs. We expect our operating results for the foreseeable future to depend on sales to a small number of OEMs and on the ability of these OEMs to sell mobile devices that incorporate our products and/or technology. Our revenue may fluctuate from quarter to quarter as our sales are dependent upon the timing of OEMs’ design cycles and product introductions. Substantially all of our sales to date have been made on a purchase order basis, which permits our OEMs to cancel, change or delay product purchase commitments with little or no notice to us and may make our revenue volatile from period to period. Our OEMs are generally not obligated to purchase from us and may purchase voice and audio solutions from our competitors.

We typically work with OEMs to obtain design wins prior to the OEM entering into an agreement with an MNO to produce a given mobile device. However, even if the design win is awarded, the OEM or MNO may cancel a given mobile device launch. Although it would be time consuming for an OEM to design our products out of mobile devices currently in production, an OEM may seek to do so or to establish a second source. Even if our products offer superior sound quality, OEMs may elect to divide their purchases among two or more companies that supply voice and audio solutions to avoid becoming reliant on a single supplier and due to the perception that having multiple suppliers will enable the OEM to secure more favorable pricing. OEMs may decline to design in our products if one or more of the features of our products do not perform as well as those offered by other suppliers, despite our other features’ superior performance. We do not have agreements with our OEMs requiring them to incorporate our processors in future mobile devices. Our OEMs are not obligated to complete the development or begin commercial shipment of any devices that incorporate our processors.

We derive a significant portion of our revenue from the high-end smart phone market, and reductions in the growth rate of this market segment could adversely affect our revenue and significantly harm our business, financial condition, operating results and cash flows.

Much of our revenue comes from sales to OEMs incorporating our products in high-end smart phones. Even if our products continue to be incorporated in these and similar high-end smart phone models, shipment volumes of our products may decrease because of reduced demand for high-end smart phones due to either user or MNO preference for less expensive smart phone models, or due to saturation of demand among users. If demand for

 

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high-end mobile devices were to decline or fail to continue to grow in a manner consistent with expectations, our business, financial condition, operating results and cash flows would be significantly harmed.

We are dependent on sales of mobile devices that incorporate our processors and software, and a decline in the demand for these mobile devices could harm our business.

Since inception, our revenue has been generated from the sale of processors and processor IP for mobile devices. Continued market adoption of mobile device sound quality solutions, as well as motion sensor and voice quality software, is critical to our future success. Our success is also dependent on our OEMs’ ability to successfully commercialize their mobile devices in which our solutions are incorporated. The markets for our OEMs’ mobile devices are intensely competitive and are characterized by rapid technological change. These changes result in frequent product introductions, short product life cycles and increased device convergence and capabilities. Mobile devices incorporating our solutions may not achieve market success or may become obsolete. We cannot assure you that our OEMs will dedicate the resources necessary to promote and commercialize mobile devices incorporating our solutions, successfully execute their business strategies for these mobile devices, be able to manufacture quantities sufficient to meet demand or cost effectively manufacture mobile devices at high volume. Any of these factors, as well as more general mobile device industry issues, could result in a decline in sales of mobile devices that incorporate our products. If demand for our products or our OEMs’ mobile devices were to decline, fail to continue to grow at all or in a manner consistent with expectations, our revenue would decline and our business would be harmed.

We may not be successful in our efforts to diversify end user devices that incorporate our products and may not realize substantial revenue from sales of our products for devices other than high-end smart phones.

We have made efforts to diversify the end user devices that incorporate our products. As a result of recent design wins, our processors have been included in personal computers and a smartwatch. However, we have limited experience selling in these new markets in which competition for design slots is intense, and may not achieve market acceptance or design wins in end user devices that are produced in substantial numbers. If we are unable to realize more revenue from the sale of our products for devices other than high-end smart phones, we may not be able to maintain or increase our revenue.

We may not be successful in our efforts to expand our product offerings.

We have expanded our product portfolio to include codecs, which can translate back and forth between analog audio and digital signals, motion sensor software and voice quality software. We have limited experience in designing audio codecs, motion sensor software and audio quality software, and selling processors that include audio codecs or software. The market for audio codecs, motion sensor software and audio quality software is intensely competitive and we may not achieve market acceptance or design wins in end user devices that are produced in substantial numbers. In addition, we may encounter unforeseen difficulties, complications and other unknown factors that may delay deployment of processors that include our audio codec or in our software releases. If we are unable to realize revenue from the sale of our processors incorporating audio codecs or from our software offerings, we may not be able to maintain or increase our revenue.

In November 2014, we announced our first generation of software products that improve audio quality, reduce background noise and assist with voice-controlled applications. In addition, we are developing new versions of our processors that feature the ability to track and process information from motion sensors. We have limited experience in designing and selling software products and processors with motion sensing capabilities and may not be successful in doing so. In addition, we may encounter unforeseen difficulties, complications and other unknown factors that may delay deployment of our processors or software. The markets for audio software and motion sensor solutions are rapidly evolving and we may not achieve market acceptance or design wins in end user devices that are produced in substantial numbers. A failure to integrate our audio processing with motion sensing software in a timely manner, could adversely affect our business, financial condition or results of operations. If we are unable to realize revenue from the sale of our software and processors incorporating motion sensing, we may not be able to maintain or increase our revenue.

 

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We have a history of losses, and we may not be able to achieve profitability in the future.

Since our formation, we incurred a net loss in every year prior to 2010 and we incurred a net loss in 2014. Although we had net income in 2010 through 2013, we experienced a net loss in the three months ended September 30, 2013 and each quarter thereafter. We expect to incur net losses in the three months ending March 31, 2015. As of December 31, 2014, our accumulated deficit was $98.1 million.

We anticipate continuing to spend significantly to develop new processors and software solutions and expand our business, including expenditures for additional personnel in sales, marketing and research and development. As a public company, we will also continue to incur significant legal, accounting and other expenses as a result of regulatory requirements. We may encounter unforeseen difficulties, complications and delays and other unknown factors that require additional expenditures. Due to these increased expenditures, we will have to generate and sustain higher revenue in order to maintain and sustain profitability. Our rate of revenue growth may not be sustainable and we may not generate revenue in excess of our anticipated additional expenditures to maintain profitability.

Our expense levels are based in part on our expectations as to future sales and a significant percentage of our expenses are fixed in the short term. If sales are below expectations, our operating expenses would be disproportionately high relative to revenue, which would adversely impact our profitability. Although we were profitable in 2010 through 2013, we were not profitable in 2014. We do not expect to be profitable in the three months ended March 31, 2015 and we may not be able to return to profitability in the near term. Failure to return to profitability may require us to raise additional capital, which may not be available on terms acceptable to us, or at all.

Our operating results may fluctuate significantly as a result of a variety of factors, many of which are outside of our control, and you should not rely on our quarterly comparisons as an indicator of future performance.

Our operating results may fluctuate due to a variety of factors, many of which are outside of our control. Our sales cycles are long and unpredictable and our sales efforts require substantial time and expense. Our revenue is difficult to predict and may vary substantially from quarter to quarter, which may cause our operating results to fluctuate significantly. We ship a significant portion of our processors in the same quarter in which they are ordered such that small delays in receipt of purchase orders and shipment of products could result in our failure to achieve our internal forecasts or stock market expectations. In any quarter, our revenue may be largely attributable to the timing of our OEMs’ orders. Our OEMs often increase purchases of our processors as part of product launches and the timing of those product launches may cause the timing of our orders with our OEMs to fluctuate. Our revenue depends on the ability of OEMs to sell mobile devices that incorporate our processors. In addition, we expect our gross margins to fluctuate over time depending on the mix of more recently introduced products and older products that are subject to average selling price erosion resulting in declining margins, as well as the mix between sales of processors and license of our processor IP. For these reasons, comparisons of our operating results on a period to period basis may not be meaningful. You should not rely on our past results as an indication of our future performance. If our revenue or operating results fall below the expectations of investors or the securities analysts that follow us, the price of our common stock may decline.

Other factors that are difficult to predict and that may affect our operating results include:

 

    the timing and magnitude of shipments of our processors and the sale of mobile devices that have integrated and enabled our processor IP in each quarter;

 

    the extent to which and the timing of when our OEMs launch new mobile devices incorporating our voice and audio processors;

 

    deferral of purchases of existing mobile devices in anticipation of new devices from our OEMs;

 

    the introduction of new mobile device operating systems or upgrades and their impact on sales of existing mobile devices;

 

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    the timing of product introductions or upgrades or announcements by us or our competitors;

 

    the gain or loss of one or more design wins with one or more significant OEMs;

 

    fluctuations in demand and prices for our voice and audio processors;

 

    increases in the cost to manufacture, assemble and test our processors;

 

    OEMs overbuilding inventories of mobile devices and reducing purchases of our processors as they sell their excess inventory;

 

    efforts to reduce the cost and/or the bill of materials of OEMs’ mobile devices and the impact on our pricing;

 

    our ability to anticipate changing demands and develop new technologies, products and improvements that meet OEM and MNO requirements on a timely basis;

 

    production delays as a result of manufacturing capacity or quality issues;

 

    unanticipated bad debt reserves or charges for excess or obsolete inventory;

 

    changes in industry standards in the mobile device industry;

 

    any change in the competitive landscape of our industry, including consolidation or the emergence of new competitors and announcements by us of significant acquisitions;

 

    general economic conditions in the markets in which we operate; and

 

    other factors outside of our control.

For these reasons, comparisons of our operating results on a period to period basis may not be meaningful. You should not rely on our past results as an indication of our future performance.

If we are unable to attract and retain highly qualified personnel, our business, financial condition, operating results and cash flows would be harmed.

Our future success depends on our continued ability to attract and retain highly qualified technical, sales, support and management personnel. In particular, our ability to improve and maintain our technology requires talented software and hardware development engineers with specialized skills in areas such as computational auditory scene analysis algorithms, acoustic engineering, digital and analog integrated circuit design, sensor analysis software and mobile systems design and integration. If we are unable to recruit and retain these engineers, the quality and speed with which our solutions are developed would likely be seriously compromised and our reputation and business would suffer as a result. Our sales positions require candidates with specific sales and engineering backgrounds in the integrated circuit or mobile device manufacturing industries and we may be unable to locate and hire individuals with these credentials as quickly as needed, if at all. Once new sales personnel are hired, we need a reasonable amount of time to train them before they are able to effectively and efficiently perform their responsibilities. Failure to hire and retain qualified sales personnel could adversely impact our sales. Competition for these and the other personnel we require, particularly in Silicon Valley, is intense. In recent months, our employees have been subject to aggressive recruitment efforts by established publicly traded companies, which has led to an increase in attrition. If our stock price performs poorly, it may adversely affect our ability to retain employees receiving stock-based compensation. We may fail to attract or retain highly qualified technical, sales, support and management personnel necessary for our business. If we are unable to attract and retain the necessary key personnel, our business, financial condition, operating results and cash flows could be harmed.

 

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The market for mobile device components is highly competitive and includes larger companies with significantly greater resources than we have. If we are unable to compete effectively, we may experience decreased sales or increased pricing pressure, which would adversely impact our business, financial condition, operating results and cash flows.

The market for mobile device components is highly competitive and we expect competition to intensify in the future. There are a number of components in the voice and audio subsystem of a mobile device including baseband processors, audio codecs and voice and audio processors. We provide voice and audio processors, and have begun providing audio codecs to compete in the mobile device component market. We have also started to offer software solutions for motion sensing, such as MotionQ, and voice quality, such as Audience S1.0, and in the future, may elect to expand our offerings further to include other subsystem components. As such, we compete and, in the future may continue to compete, against companies offering those subsystem components. Companies that currently compete for sales of other mobile device components may enter the voice and audio processor market with stand-alone components or software solutions with other functionalities and compete with us.

We currently face, or expect to face, competition from a number of established companies that produce components or software for the mobile device audio subsystem, or provide motion sensor solutions, such as Cirrus Logic, DSP Group, Maxim, NXP, InvenSense, Qualcomm and Texas Instruments. We also face competition from smaller, privately held companies, such as Fortemedia and Hillcrest Labs, and could face competition from new market entrants, whether from new ventures or from established companies moving into the areas of voice and audio subsystems that our products address.

We also compete against solutions internally developed by OEMs, as well as third-party software and hardware systems. OEMs may seek to reduce the number of processors in their mobile devices and incorporate the functionality of our voice and audio processors into the central processing units of their mobile devices. OEMs may also internally develop or rely on third-party suppliers to provide central processing units that combine multiple functionalities, including those provided by our processors, which could reduce the demand for our processors and adversely impact our business, financial condition, operating results and cash flows.

Many of our well established current and potential competitors have longer operating histories, greater brand awareness, a more diversified OEM base, a longer history of selling voice and audio subsystem components and software to OEMs and significantly greater financial, technical, sales, marketing and other resources than we have. As a result of their established presence in the industry, some of our competitors have substantial control and influence over future trends in the industry, including acceptance of a particular industry standard or competing technology. Many of our competitors benefit from long-standing relationships selling voice and audio subsystem components to key decision makers at many of our current and prospective OEMs. Our competitors may be able to leverage these existing OEM relationships to persuade our current and potential OEMs to purchase our competitors’ products, regardless of the performance or features of our processors. Our competitors may also be able to devote greater resources to the development, promotion and sale of products, which could allow them to introduce new technologies and products to the market faster than we can. Because many of our competitors have greater resources than we have and are able to offer a more diversified and comprehensive bundle of products and services, these competitors may be able to adopt more aggressive pricing policies than we can, through which they could deliver competitive products or technologies at a lower price than our processors or provide free or promotional offers with the purchase of a package of products. Due to the larger production and sales volumes enjoyed by our larger competitors across multiple product families, our competitors may be able to negotiate price reductions, production dates and other concessions from their suppliers that we cannot. If our competitors are able to undercut our prices and/or improve their product performance, we may be unable to remain competitive in the industry and lose sales or be forced to reduce our selling prices. This could result in reduced gross margins, increased sales and marketing expenses or our failure to increase or maintain market segment share, any of which could seriously harm our business, financial condition, operating results and cash flows.

 

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Our ability to compete effectively depends on a number of factors, including:

 

    our ability to attract, retain and support OEMs and to establish and maintain relationships with MNOs;

 

    our ability to recruit and retain engineering, sales and marketing personnel;

 

    our processors’ scalability, performance, quality, ease of use and cost effectiveness relative to those of our competitors’ products;

 

    our success in developing and creating demand for new and proprietary technologies to offer products and features, including, but not limited to, our recently introduced VoiceQ feature;

 

    our ability to continue to improve and enhance the features and functions of our current products;

 

    our success in identifying new markets, applications and technologies;

 

    our products’ interoperability with various data access protocols and other voice and audio subsystem components of mobile devices;

 

    our ability to continue to establish greater name recognition and build upon our reputation in the industry;

 

    our ability to respond effectively to aggressive business tactics by our competitors, including providing software solutions, selling at lower prices, bundling products, or asserting intellectual property rights, irrespective of the validity of the claims; and

 

    our ability to protect our intellectual property.

If the market for mobile devices with improved sound quality and the demand for our products do not continue to grow as we expect, our business, financial condition, operating results and cash flows could be materially and adversely affected.

Our processors are designed to address the sound quality challenges faced by users with their mobile devices. OEMs and MNOs may decide that the costs of additional improvements to sound quality outweigh the benefits, which could limit demand for our solutions. Users may also be satisfied with existing sound quality or blame poor quality on their MNOs’ networks. The market for our products is evolving rapidly and is technologically challenging, and our future financial performance will depend in large part on growth of this market and our ability to adapt to user, OEM and MNO demands. Our current products are primarily focused on improving the sound quality of mobile devices. Consequently, we are vulnerable to fluctuations in or the absence of demand for products that improve sound quality. A number of factors could adversely affect the growth in the market or the demand for our products, including the following:

 

    introduction of new mobile devices with different components or software that provide similar functionality as our products;

 

    internally developed solutions that reduce the demand for our products;

 

    lower cost solutions;

 

    lack of user acceptance of sound quality improvements that we may develop or our inability to timely develop product enhancements that satisfy user requirements;

 

    OEM budgetary constraints or reduced bill of materials spending on sound quality solutions; and

 

    OEM design constraints for sound quality solutions and tradeoffs they face in the design process.

If the average selling prices of our products decrease, our revenue and gross margins could decline.

Consistent with trends in the semiconductor industry, we have reduced the price of our products in the past and may do so in the future. Because of the resources available to and the broader product portfolios of many of

 

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our large, established competitors, erosion in average selling prices throughout our industry could have a larger impact on our business than on these large competitors. We may also elect to sell lower priced products to address the requirements of mobile devices with lower price points, which could cause our average selling prices, revenue and gross margins to decline. Our average selling prices and gross margins may vary substantially from period to period as a result of the mix of products we sell during any given period and the relative proportion of royalty revenue. As a result, our revenue and gross margin results in any period may fall short of investors’ and securities analysts’ expectations and our stock price may decline. If the capability of noise suppression hardware and/or software solutions offered by our competitors continues to increase, the average selling prices of our noise suppression products may decline. We may not be able to introduce additional, desired functionality into our products in a timely enough manner to prevent the price erosion of our products. If the average selling prices for our existing products decline without offsetting cost reductions and we are unable to introduce and develop significant demand for higher margin processors and audio codecs, we may be unable to maintain our gross margins and our revenue may decline. In addition, new products with additional functionality may have increased costs, but the selling prices for such new products may not offset such cost increases, which could reduce our gross margins.

If we are unsuccessful in developing, selling or licensing new products that achieve market acceptance, our ability to attract and retain OEMs could be impaired, our competitive position could be harmed and our revenue could be reduced.

We compete in a market characterized by rapid technological change, frequent new product introductions, changing OEM needs, evolving MNO requirements and increasing user demands. We expect technical requirements of voice and audio solutions in mobile devices to evolve rapidly. Improvements in existing technologies and applications may reduce or eliminate the need for our products or our competitors may improve their product performance. The role played by our products may also be filled by products combining voice and audio processing and other aspects of the voice and audio subsystem. Improvements in other emerging technologies, such as reduction of background noise through MNO network components, could have a similar effect. Our future growth depends on our ability to anticipate future market needs and to successfully design, develop, market and sell new products that provide increasingly higher levels of user experience, performance, functionality and reliability that meet the cost expectations of our OEMs. We may also need to expand our product portfolio to perform some of the other functions of the voice and audio subsystems in mobile devices to achieve widespread market acceptance. In the event that noise suppression as a stand-alone feature is offered by competitors as a software solution or in combination with other hardware, our noise reduction products may be less attractive to OEMs. Developing our products is expensive and the development investment may involve a long payback cycle. We believe that we must continue to dedicate a significant amount of resources to our research and development efforts to maintain and extend our competitive position.

Our new products must address technological changes and evolving industry standards and may not achieve market acceptance. In the event that new products require features that we have not developed or licensed, we will be required to develop or obtain such technology through purchase, license or other arrangements. If the required technology is not available on commercially reasonable terms, or at all, we may incur additional expenses in an effort to internally develop the required technology.

We cannot assure you if or when the products and solutions on which we have focused our research and development expenditures, or have obtained through acquisitions, will become commercially successful or generate a sufficient return. Despite our efforts to develop new and successful voice and audio processor solutions, our competitors, many of whom have greater financial and engineering resources than we do, may be able to introduce new processors and/or software solutions more quickly and at reduced selling prices than we can. If our investments in acquisitions and research and development do not achieve market acceptance or the desired returns in a timely manner, our ability to attract and retain OEMs could be impaired, our competitive position could be harmed and our revenue could be reduced. In addition, we may not have sufficient resources to maintain the level of investment in research and development required to remain competitive or succeed in our strategy.

 

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Our sales cycles can be long and unpredictable. Our sales efforts often require substantial time and expenses and are often more than a year in advance of the first commercial sale of the mobile devices including our products.

Our sales efforts involve educating our current and prospective OEMs and MNOs about the use and benefits of our processors as compared to sound quality solutions they currently use or other solutions that are available. OEMs often undertake a significant design, evaluation and test process that can result in a lengthy sales cycle that ranges from 9 to 12 months, but has, in some cases, exceeded 12 months from initial contact to the award of a design win. We spend substantial time and resources on our sales efforts without any assurance that they will result in a design win or that the mobile device will be produced at scale. The award of design wins by our current and prospective OEMs are frequently subject to bill of material constraints, multiple approvals and a variety of administrative, processing and other delays. Purchases of our processors may also occur in connection with a new product launch, which may be delayed or postponed indefinitely. Once we secure a design win, it may be up to 12 months before the OEM begins commercial production of a corresponding mobile device and we begin to generate revenue. The effect of these factors tends to be magnified in the case of substantial mobile device redesigns that are unrelated to our products.

The selection processes for mobile device designs are lengthy and can require us both to incur significant design and development expenditures and dedicate significant engineering resources in pursuit of a single OEM opportunity. We may not win the competitive selection process and may never generate any revenue despite incurring significant design and development expenditures. These risks are exacerbated by the fact that some of our OEMs’ products likely will have short life cycles. Failure to obtain a design win could prevent us from supplying an entire generation of a product. This could cause us to lose revenue and require us to write off obsolete inventory and could weaken our position in future competitive selection processes. Our lengthy and uncertain sales cycles make it difficult for us to predict when OEMs may purchase and accept products from us or sell mobile phones that have integrated and enabled our licensed processor IP, may prevent us from recognizing revenue in a particular quarter and ultimately may not produce any sales. As a result, our operating results may vary significantly from quarter to quarter.

If we are unable to adequately control our cost of revenue, our gross margins could decrease, we may not sustain or maintain profitability and our business, financial condition, operating results and cash flows could suffer.

The largest component of our cost of revenue is production costs of our processors. We have made, and expect to continue to make, significant efforts to reduce the cost of our processors, including but not limited to wafer costs. Our processors are fabricated by TSMC and GlobalFoundries, for both of which we are not a large customer. We rely on third parties, such as STATS ChipPAC Ltd. for assembly, packaging and test. The low volume of our orders relative to other customers at these suppliers makes it difficult for us to control the cost of the fabrication of our processors. As compared to our larger competitors, we typically do not purchase a sufficiently high volume of wafers and services to obtain the discounts that our larger competitors may be able to obtain from their foundries and other suppliers. We do not have long-term supply contracts with our suppliers. If we are unable to reduce, or maintain controls over, our cost of manufacturing relative to our selling prices, our business, financial condition, operating results and cash flows could be materially and adversely impacted.

We may experience difficulties demonstrating the value to OEMs and MNOs of newer, higher priced products if they believe existing lower cost products are adequate to meet user expectations regarding sound quality, which would cause our revenue to decline and negatively affect our business, financial condition, operating results and cash flows.

As we develop and introduce new solutions, including audio and multisensory solutions, we face the risk that OEMs may not understand or be willing to bear the additional cost of incorporating these newer solutions into their mobile devices. MNOs may also be unwilling to require OEMs to include newer sound quality solutions if they believe users are satisfied with current solutions. Transitioning OEMs and MNOs to newer generations of solutions involves a substantial

 

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amount of time educating them on the benefits provided by the newer solutions. Regardless of the improved features or superior performance of the newer solutions, OEMs may be unwilling to adopt our new solutions as a result of design or cost constraints associated with their new mobile device introductions. We must also successfully manage product transition in order to minimize disruption in our OEMs’ ordering and purchasing patterns, provide timely availability of sufficient supplies of new products to meet OEM demand and avoid reductions in the demand for our existing processors. If we fail to manage the transition successfully, we may have to write down or write off excess inventory. Due to the extensive time and resources that we invest in developing new solutions, if we are unable to sell OEMs new generations of our solutions, our revenue could decline and our business, financial condition, operating results and cash flows could be negatively impacted.

If our voice and audio processors fail to integrate or interoperate with our OEMs’ product designs, including various system control and audio interface protocols, we may be unable to maintain or increase market segment share and we may experience reduced demand for our processors.

Our products must integrate and interoperate with our OEMs’ existing and future mobile devices, including components such as baseband processors, audio codecs, microphones and software applications, each of which may have different specifications. When new or updated versions of these components, interface protocols or software applications are introduced, or if we find defects in other vendors’ or our OEMs’ software or hardware or an incompatibility or deficiency in our products, we may need to develop updated versions of our products so that they interoperate properly. We may not complete these development efforts quickly, cost effectively or at all. These development efforts may require substantial capital investment and the devotion of substantial resources. In addition, our OEMs may rely on third-party vendors to provide chipset kits for our OEMs’ use in designing their mobile devices. These chipset kits may not include our products and may include components, hardware requirements, interface protocols or software applications that do not interoperate properly with our products. If we fail to achieve and maintain compatibility with components, hardware requirements, interface protocols or software applications, our products may not be able to fulfill our OEMs’ requirements, or we may experience longer design win and development cycles or our solutions may be designed out of mobile devices. As a result, demand for our products may decline and we may fail to increase or maintain market segment share.

We are subject to business uncertainties that make it difficult to forecast demand and production levels accurately and to have our products manufactured on a timely basis, which could interfere with our ability to deliver our processors and generate sales.

Sales of our processors are generally based on purchase orders with our OEMs rather than long-term purchase commitments. As a result, it is difficult to accurately forecast OEM demand for future periods. Our primary foundry, TSMC, produces silicon wafers for other fabless semiconductor companies in volumes that are far greater than ours. We do not have supply or timing commitments from TSMC or GlobalFoundries and our production orders are typically filled on a delayed basis as production capacity becomes available between larger orders. In order to secure foundry space for the production of our processors on a timely basis and to ensure that we have sufficient inventory to meet our OEMs’ demands, we place orders with TSMC and GlobalFoundries well in advance of receipt of OEM orders. If we inaccurately forecast demand for our processors, we may have excess or inadequate inventory or incur cancellation charges or penalties. Excess inventory levels could result in unexpected charges to operations that could adversely impact our business, financial condition, operating results and cash flows. Conversely, inadequate inventory levels could cause us to forego revenue opportunities, potentially lose market segment share and harm our OEM relationships. As we continue to introduce new products, we may need to achieve volume production rapidly. We may need to increase our wafer purchases, foundry capacity and assembly, packaging and test operations if we experience increased demand. The inability of TSMC or GlobalFoundries, as the case may be, to provide us with adequate supplies of our processors on a timely basis, or an inability to obtain adequate quantities of wafers or packages, could cause a delay in our order fulfillment and could interfere with our ability to generate revenue.

 

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We rely on a limited number of manufacturing, assembly, packaging and test, as well as logistics, contractors, in some cases single sources, and any disruption or termination of these arrangements could delay shipments of our voice and audio processors and reduce our revenue.

We rely on a limited number of contractors for several key functions in producing our processors, including the processors themselves, which are primarily manufactured by TSMC and to a lesser extent by GlobalFoundries. We also rely on third parties, such as Signetics, Amkor and STATSChipPAC, for assembly, packaging, testing and warehousing, and other contractors for logistics. This reliance on a limited number of contractors involves several risks, including:

 

    capacity constraints;

 

    price increases;

 

    delivery delays; and

 

    yield and other quality issues.

If any of these contractors were to cancel or materially change their commitments to us or fail to meet the quality or delivery requirements needed to allow us to timely manufacture, assemble, package, test and deliver our processors, we could lose time-sensitive OEM orders or be forced to pay damages for the cost of replacement components, be unable to develop or sell certain processors cost effectively or on a timely basis, if at all, and experience significantly reduced revenue. In the event that it became necessary to find other contractors, transition to a new vendor could take significant time due to the technology development process and other qualification criteria for a different contractor. For example, developing a second source foundry for one of our products could require us to redesign the product to meet the specialized requirements of that foundry. Inadequate supplies of critical components, such as wafers or packages, may also impair our ability to fulfill orders in a given quarter and/or result in a decrease in our revenue.

We currently rely primarily on TSMC to manufacture our processors and to a lesser extent, GlobalFoundries. Our reliance on TSMC and GlobalFoundries reduces our control over the fabrication process, exposing us to risks, including reduced control over quality assurance, production costs and product supply. If we fail to manage our relationship with TSMC and GlobalFoundries effectively, or if TSMC or GlobalFoundries experiences delays, disruptions, capacity constraints or yield problems in its operations, our ability to ship products to our OEMs could be impaired and our competitive position and reputation could be harmed. We do not have a supply agreement with TSMC or GlobalFoundries and neither of them is under any obligation to continue to supply us at all or at the capacity we need. We are a relatively small customer of each of TSMC and GlobalFoundries and, in times of capacity constraint, we may not receive the capacity allocation we need. If TSMC or GlobalFoundries, as the case may be, is unwilling or unable to meet our production requirements, we would be required to engage a new foundry. Qualifying a new foundry and commencing volume production would be expensive and time consuming. While we have engaged GlobalFoundries to produce some of our products, the transfer of additional products that we currently produce at TSMC to GlobalFoundries or vice versa may require significant redesign of such processors. Any redesign may take nine months or more to complete and may involve further delays if such redesigned products do not meet our or our OEMs’ performance specifications. If we are required to change foundries or move between production lines of a particular foundry or other supplier for any reason, this could disrupt the supply of our processors and increase our costs.

Disruption or termination of supplies from TSMC or GlobalFoundries and problems with yield of good die from the wafers we purchase from them could delay shipments of our products and materially and adversely affect our operating results. Production delays and quality defects are often outside of our control and are difficult to predict. Any delay of shipments or the existence of defects in our products could damage our relationships with current and prospective OEMs, increase our costs due to the time and money spent remedying the defects and reduce our revenue.

If flaws in the design, production or test of our processors were to occur, we could experience a failure rate in our products that could result in substantial yield reductions, increased manufacturing costs and harm to our

 

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reputation. We may be required to accept warranty returns from our OEMs due to production defects and may be unable to resell and have to scrap the defective products. Even minor deviations in the manufacturing process can cause substantial manufacturing yield losses or cause halts in production. We have in the past, and may in the future, experience quality problems with the die provided by our foundries and quality problems with packaging and other production activities. Our foundries and other contract manufacturers may not be able to detect these defects early in the fabrication process or determine the cause of such defects in a timely manner, which may affect the quality or reliability of our products. Although we have procedures in place to monitor the quality of our foundries’ and other contract manufacturers’ processes, we cannot assure you that our efforts will be sufficient to avoid a rate of failure in our processors that results in substantial delays in shipment or significant repair or replacement costs, any of which could result in lost sales, harm to our reputation and an increase in our operating costs.

Any errors or defects discovered in our products after commercial release could result in a loss of OEM business, a termination of design wins or increased warranty costs, any of which may adversely affect our business, financial condition, operating results and cash flows. We may also face claims for product liability and breach of warranty, including claims relating to the manner in which our products interact with other components of mobile devices produced by our OEMs. We may also be required to indemnify our OEMs for losses allegedly caused by our voice and audio solutions that are incorporated into their mobile devices. Any warranty or other rights we may have against our suppliers for yield or other quality issues caused by them may be more limited than those our OEMs have against us, based on our relative size, bargaining power or otherwise. We cannot assure you that our warranty reserves will be sufficient or either increase or decrease in future periods. Defending a lawsuit, regardless of its merit, could be costly and might divert management’s attention and adversely affect the market’s perception of us and our solutions. In addition, if the amount and scope of our business liability insurance coverage proves inadequate for a claim, or future coverage is unavailable on acceptable terms or at all, our business, financial condition, operating results and cash flows could be harmed. Past quality problems could also impair our ability to achieve new design wins with an OEM.

Our voice and audio processors may fail to meet OEM or MNO specifications or may contain undetected software or hardware defects that might result in liability to us or our OEMs or MNOs, harm to our reputation, a loss of OEMs and a reduction in our revenue.

Our processors are highly technical and complex. In many cases, our processors are assembled in customized packages or feature high levels of integration. Our products may fail to meet exacting OEM specifications for sound quality, performance and reliability or may contain undetected errors, defects or security vulnerabilities that could result in degradation in voice and audio data quality or other product failures. Some errors in our processors may only be discovered after they have been incorporated into our OEMs’ mobile devices. Resolving these errors and defects may require a significant amount of time and resources. If our voice and audio processors fail to meet OEM or MNO specifications or contain undetected software or hardware defects, we and our OEMs or MNOs may incur liability, our reputation and relationships with our OEMs and MNOs may be harmed and our revenue and results of operations may be adversely affected.

If we are unable to maintain or expand our relationships with MNOs or establish new MNO relationships, we may not be able to affect MNO demand for mobile devices that meet high sound quality specifications, which may limit our growth and adversely affect our business, financial condition, operating results and cash flows.

We have invested and continue to invest significant resources in working with MNOs to educate them about the impact of sound quality on the user experience in order to increase awareness of and demand for our processors. We also intend to collaborate with MNOs in new geographic markets in order to extend our geographic reach. MNOs may not value the improvements in sound quality that our products can provide. The specifications that MNOs impose on their OEMs may not be sufficiently high to differentiate our processors compared to the solutions of our competitors. MNOs may grant waivers to their sound quality specifications if individual mobile devices do not meet the specifications but provide other benefits to users. We do not have and

 

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do not expect to have any influence on whether a MNO waives compliance with its specifications. In addition, mobile device specifications and the level of control of MNOs over the mobile devices operating on their networks vary by OEM and geography. MNOs in geographic markets outside of the United States may impose sound quality specifications on their OEMs which are not as high as specifications by leading MNOs in the United States, which could reduce demand for the improvements in sound quality that our processors can provide and harm our ability to differentiate our processors from the solutions of our competitors in these markets. As a result, we may be unable to extend or maintain our geographic reach, which could limit our growth and harm our business. We do not have any long-term contracts with the MNOs we work with and these MNOs have no obligation to require the use of our products by their OEMs or to impose or enforce a certain level of sound quality specifications. If we are unable to maintain or expand our relationships with MNOs, we may not realize the potential benefits that we believe these relationships can provide. We cannot assure you that MNOs will continue to work with us to assess and evaluate their voice and audio requirements. If we are unable to maintain or expand our existing relationships with MNOs or enter into new MNO relationships, demand for our products may decline and our business, financial condition, operating results and cash flows may be adversely affected.

Our future effective income tax rates could be affected by changes in the relative mix of our operations and income among different geographic regions and by proposed and enacted U.S. federal income tax legislation, which could affect our business, financial condition, operating results and cash flows.

We have sought to structure our worldwide operations to take advantage of certain international tax planning opportunities and incentives. Our future effective income tax rates could be adversely affected if tax authorities in various jurisdictions challenge our international tax structure or if the relative mix of our U.S. and international income changes for any reason, or if U.S. or international tax laws were to change in the future. In particular, a majority of our revenue is generated from customers located outside the U.S. Foreign withholding taxes and U.S. income taxes have not been provided on undistributed earnings for certain non-U.S. subsidiaries because such earnings are intended to be indefinitely reinvested in the operations of those subsidiaries. In the past, the U.S. Administration has considered initiatives such as limitations on deferral of U.S. taxation of foreign earnings, eliminating utilization or substantially reducing our ability to claim foreign tax credits and eliminating various tax deductions until foreign earnings are repatriated to the U.S., which could substantially reduce our ability to defer U.S. taxes. If any of these proposals are constituted into law, they could have a negative impact on our business, financial condition, operating results and cash flows. We cannot assure you that our effective tax rate will not increase in the future.

We may not be able to sustain or manage any future growth effectively. If we fail to manage our growth effectively, we may be unable to execute our business plan, sell our voice and audio solutions successfully and adequately address competitive challenges. As a result, our business, financial condition, operating results and cash flows may suffer.

In recent periods, we have significantly expanded the size and scope of our business. Our future growth prospects depend in large part on our ability to secure design wins and orders from a broader OEM base, our ability to establish and expand our relationships with key suppliers to expand our product manufacturing, assembly, packaging, test and delivery capacity and our ability to manage our growing business effectively. In addition, we recently acquired Sensor Platforms, which will add motion sensing software to our technology offering. We have also expanded our international operations and as of December 31, 2014 had offices outside of the United States in China, India, Singapore, South Korea and Taiwan. Continued growth in our business will place significant demands on our managerial, administrative, operational, financial and other resources. Successful management of any future growth will require substantial management attention with respect to, among other things:

 

    maintaining and expanding our relationships with OEMs and MNOs and educating and supporting their product design and quality personnel;

 

    anticipating and meeting the technology needs of users;

 

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    continuing to expand and improve our intellectual property portfolio and making technological advances;

 

    expanding our relationships with our foundries and assembly, packaging, test and logistics providers and entering into new relationships with additional foundries, assembly, packaging, test and logistics providers to ensure that we can produce, test and deliver sufficient processors to meet market demand;

 

    recruiting, hiring, integrating and retaining highly skilled and motivated individuals, including research and development and sales personnel;

 

    expanding and broadening our product development capabilities, including managing our own design center outside the United States;

 

    accurately forecasting revenue and controlling costs;

 

    enhancing and expanding our infrastructure;

 

    managing inventory levels;

 

    expanding our international operations and managing increasingly dispersed geographic locations and facilities; and

 

    implementing and improving our company-wide processes and procedures to address human resource, financial reporting and financial management matters.

If we are unable to execute our growth strategy effectively or to manage any future growth we may experience, we may not be able to take advantage of market opportunities, execute our business plan, sell our voice and audio solutions successfully, remain competitive, maintain OEM relationships or attract new OEMs. Our failure to effectively sustain or manage any future growth we do experience could result in a reduction in our revenue and materially and adversely affect our business, financial condition, operating results and cash flows.

We may not realize the anticipated benefits of past or future acquisitions, and integration of these acquisitions could disrupt our business, cause dilution to our stockholders, reduce our financial resources and harm our business.

We recently acquired Sensor Platforms, and in the future, we may acquire other businesses, products or technologies. Our ability to make and successfully integrate acquisitions is unproven and we may not realize the anticipated benefits of our recent acquisition or any other future acquisition. Any acquisition, including our acquisition of Sensor Platforms, has numerous risks. Such acquisitions may not strengthen our competitive position or achieve the financial and strategic goals for the acquired and combined businesses in a timely manner, or at all, and these acquisitions may be viewed negatively by OEMs, financial markets or investors. In addition, any acquisitions we make could lead to difficulties in integrating personnel, technologies and operations from the acquired businesses. We may also experience difficulty in retaining and motivating key personnel, as well as key customers, vendors and other business partners from these businesses. Acquisitions may disrupt our ongoing operations, divert management from their primary responsibilities and employees from other opportunities, subject us to additional liabilities, increase our expenses and adversely impact our business, financial condition, operating results and cash flows. Acquisitions may also reduce our cash available for operations and other uses and could result in an increase in amortization expense related to intangible assets acquired, potentially dilutive issuances of equity securities or the incurrence of debt, any of which could harm our business. Mergers and acquisitions of companies are inherently risky, and ultimately, if we do not complete the integration of acquired businesses successfully and in a timely manner, we may not realize the anticipated benefits of the acquisitions to the extent anticipated, which could adversely affect our business, financial condition, results of operations and cash flows.

 

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We may be required to recognize a significant charge to earnings if our goodwill or other intangible assets become impaired.

Goodwill and other intangible assets with indefinite lives are not amortized, but are tested for impairment at least annually or more frequently if an event or circumstance occurs that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Factors that would suggest a possible impairment include, but are not limited to a significant decrease in our stock price, material customer losses, an adverse change in the business climate, an adverse action or assessment by a regulator, unanticipated competition or a loss in key personnel. We recorded goodwill related to a prior acquisition, and may do so in connection with any potential future acquisitions. We may be required to record a significant charge in our financial statements during the period in which any impairment of our goodwill or other intangible assets is determined, which would adversely impact our results of operations. For example, during the three months ended December 31, 2014, we recorded a $31.3 million impairment charge related to goodwill and intangible assets which was the result of a change in our enterprise value, based on the trading prices of our common stock.

The political and economic conditions of the countries in which we conduct business and other factors related to our international operations could adversely affect our business, financial condition, operating results and cash flows.

We have generated substantially all of our revenue from sales to CMs and OEMs that manufacture in Asia or distributors located in Asia and we expect sales to such CMs, OEMs and distributors to contribute a majority of our revenue in the foreseeable future. We have sales and technical support personnel in countries other than the United States and we outsource all manufacturing, assembly, packaging and test of our processors to third parties in Asia, as well as a portion of product development to third parties outside the U.S. During 2012, we opened our own design center in India and sales and sales support operations in China. During 2013 and 2014, we continued to expand our operations in these locations. Our international operations subject us to a variety of risks, including:

 

    difficulties in managing and staffing international offices and increased travel, infrastructure and legal compliance costs associated with multiple international locations;

 

    the challenge of managing a development team in geographically disparate locations;

 

    differing employment practices and labor relations issues;

 

    difficulties in enforcing contracts, judgments and arbitration awards and collecting accounts receivable and longer payment cycles;

 

    impediments to the flow of foreign exchange capital payments and receipts due to exchange controls instituted by certain foreign governments;

 

    tariffs and trade barriers and other regulatory or contractual limitations on our ability to sell or develop our processors in various foreign markets, threats to U.S. national security or violation of U.S. laws;

 

    difficulties in obtaining governmental and export approvals for communications, processors and other products;

 

    restrictions imposed by the U.S. government on our ability to do business with certain companies or in certain countries as a result of international political conflicts;

 

    increased exposure to foreign currency exchange rate risk;

 

    burdens of complying with a wide variety of complex foreign laws and treaties and unanticipated changes in local laws and regulations, including tax laws;

 

    potentially adverse tax consequences;

 

    reduced protection for intellectual property rights in some countries; and

 

    political and economic instability.

 

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As we expand our business globally, including China, our success will depend, in large part, on our ability to anticipate and effectively manage these risks. Our failure to manage any of these risks successfully could adversely affect our business, financial condition, operating results and cash flows.

If we need additional capital in the future, it may not be available to us on favorable terms, or at all.

We cannot assure you that we will be successful in executing our business plan, maintaining and growing our existing OEM base or achieving and sustaining profitability. Failure to generate sufficient revenue, achieve planned gross margins or control operating costs may require us to raise additional capital through equity or debt financing. Such additional financing may not be available on acceptable terms, or at all and could require us to modify, delay or abandon some of our planned future expansion or expenditures or reduce some of our ongoing operating costs, which could have a material adverse effect on our business, financial condition, operating results and cash flows and ability to achieve our intended business objectives. If we raise additional funds through further issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership and any new securities we issue could have rights, preferences and privileges senior to those of holders of our common stock.

We are exposed to fluctuations in currency exchange rates that could negatively impact our business, financial condition, operating results and cash flows.

Because a portion of our business is conducted outside of the United States, we face exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and they could have a material adverse impact on our financial results and cash flows. Historically, we have paid our suppliers and sold our products in U.S. dollars. We have also historically paid our outsourced research and development services provider in U.S. dollars. As we start performing those research and development activities ourselves and have more significant non-U.S. payroll and operating expenses, we may begin to incur material expenses in currencies other than the U.S. dollar. Increases in the value of these currencies relative to the U.S. dollar could increase our operating expenses. In addition, an increase in the value of the U.S. dollar could increase the real cost of our products to OEMs that produce and sell their mobile devices outside of the United States. This may increase pressure on and result in erosion of our average sales prices without any offset in our production costs if we continue to pay those expenses in U.S. dollars, which could compress our margins. Average selling price erosion, compressed margins and increased operating expenses could have a negative effect on our business, financial condition, operating results and cash flows.

Our business is vulnerable to interruption by events beyond our control, including earthquakes, fire, floods, disease outbreaks and other catastrophic events.

Our corporate headquarters and the operations of our key OEMs, foundries and third-party contractors which we rely on for assembly, packaging, testing, warehousing and logistics are located in areas exposed to risks of natural disasters such as earthquakes and tsunamis, including the San Francisco Bay area, China, Japan, Singapore, South Korea and Taiwan. Our finished goods inventory of processors for many of our OEMs, including Samsung, is warehoused at a single facility located in Singapore, and any catastrophic loss to this facility could significantly disrupt our operations and delay shipments and revenue. A significant natural disaster, such as an earthquake, tsunami, fire or flood, or other catastrophic event such as disease outbreak, could have a material adverse impact on our business, financial condition, operating results and cash flows. In the event that any of our OEMs’ or CMs’ information technology systems, manufacturing facilities or logistics abilities are impeded by any of these events, shipments could be delayed and we could miss key financial targets, including revenue and earnings estimates, for a particular quarter.

 

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Risks related to regulations to which we may be subject and our intellectual property

Concerns over possible health and safety risks posed by mobile devices may result in the adoption of new regulations and may otherwise reduce the demand for our products and those of our OEMs.

Concerns over the effects of radio frequency emissions, even if unfounded, may have the effect of discouraging the use of mobile devices, which may decrease demand for our products and those of our OEMs. In recent years, the Federal Communications Commission (“FCC”) and foreign regulatory agencies have updated the guidelines and methods they use for evaluating radio frequency emissions from radio equipment, including mobile phones and other mobile devices. In addition, interest groups have requested that the FCC investigate claims that wireless communications technologies pose health concerns and cause interference with airbags, hearing aids and medical devices. Concerns have also been expressed over the possibility of safety risks due to a lack of attention associated with the use of mobile devices while driving. These concerns and any future legislation that may be adopted in response to them, could reduce demand for our products and those of our OEMs in the United States as well as other countries, which could materially and adversely affect our business, financial condition, operating results and cash flows.

Claims of infringement against us or our OEMs could increase our expenses, disrupt our ability to sell our voice and audio solutions and reduce our revenue.

The mobile communications industry is characterized by the existence of a large number of patents, trademarks, trade secrets and copyrights and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. Third parties may claim that our processors or technologies infringe or misappropriate their intellectual property rights. The costs associated with any actual, pending or threatened litigation could negatively impact our operating results regardless of the actual outcome.

We expect that infringement claims and misappropriation claims may increase as the number of products and competitors in our market increases and as we gain greater visibility and market exposure as a public company. We cannot assure you that we do not currently infringe or misappropriate, or that we will not in the future infringe or misappropriate, any third-party patents or other proprietary rights. For instance, because patent applications in the United States and foreign jurisdictions are typically maintained in confidence for up to 18 months after their filing or, in some cases, for the entire time prior to issuance as a U.S. patent, third parties may have earlier filed applications covering methods or other inventions that we consider our trade secrets. The limited size of our patent portfolio may not provide meaningful deterrence against third parties alleging that we infringe their patents, particularly against patent holding companies or other adverse patent owners who have no relevant product revenue. Any claims of infringement or misappropriation by a third party, even those without merit, could cause us to incur substantial costs defending against the claims and could distract our management from our business. A party making such a claim, if successful, could secure a judgment that requires us to pay substantial damages. A judgment could also include an injunction or other court order that could prevent us from offering our processors or licensing our processor IP. In addition, we might be required to seek a license for the use of the infringed intellectual property, which might not be available on commercially reasonable terms or at all. Alternatively, we might be required to develop non-infringing technology, which could require significant effort and expense and might ultimately be unsuccessful. Any of these events could seriously harm our business, financial condition, operating results and cash flows.

Third parties may also assert infringement claims against our OEMs. Claims against our OEMs may require us to initiate or defend potentially protracted and costly litigation on an OEM’s behalf, regardless of the merits of these claims, because we generally agree to defend and indemnify our OEMs with which we have long-term agreements from claims of infringement and misappropriation of proprietary rights of third parties based on the use or resale of our products. Other OEMs, with which we do not have formal agreements requiring us to indemnify them, may ask us to indemnify them if a claim is made as a condition to awarding future design wins to us. Because our OEMs are much larger than we are and have much greater resources than we do, they may be more likely to be the target of an infringement claim by third parties than we would be, which could increase our

 

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chances of becoming involved in a future lawsuit. If any of these claims succeeds, we might be forced to pay damages on behalf of our OEMs that could increase our expenses, disrupt our ability to sell our voice and audio solutions and reduce our revenue. A party making an infringement claim against our OEMs, if successful, could secure an injunction or other court order that could prevent our OEMs from producing or selling their mobile devices incorporating our products. Any such claims or injunction against our OEMs could seriously harm our business, financial condition, operating results and cash flows.

The mobile device market is one in which competition is intense and OEMs attempt to defend and expand their market positions with their patent portfolios. In the event that one of our key OEMs were unable to market its products in one or more large geographic markets because of a court decision concluding that the OEM infringed another party’s patents, our revenue would be harmed. Our OEMs or their CMs may purchase fewer of our processors than they did in the past if such OEMs are enjoined from selling the mobile devices in which our processors are incorporated in certain markets or are required to redesign such mobile devices as a result of patent litigation. We anticipate that mobile device OEMs will continue to bring and litigate patent infringement cases against each other for some time and cannot assess the impact on our business, financial condition, operating results and cash flows from these cases.

It is also not uncommon for foundries, packaging providers or suppliers of other components in our processors to be involved in infringement lawsuits by or against third parties. Although some of our foundries, packaging providers or other suppliers are obligated to indemnify us in connection with infringement claims related to their intellectual property rights, these parties may contest their obligations to indemnify us, or their available assets or indemnity obligation may not be sufficient to cover our losses. Third-party intellectual property infringement claims that involve us or our suppliers may require us to alter our technologies, obtain licenses or cease certain activities.

We may not be able to protect and enforce our intellectual property rights, which could harm our competitive position and reduce the value of our proprietary technology.

Our success depends in part on obtaining, maintaining and enforcing our patent and other proprietary rights. We rely on trade secret, patent, copyright and trademark laws and confidentiality agreements with employees and third parties, all of which offer only limited protection. The steps we have taken to protect our proprietary rights may not be adequate to prevent misappropriation of our proprietary information or infringement of our intellectual property rights and our ability to prevent such misappropriation or infringement is uncertain, particularly in countries outside of the United States. We do not know whether any of our pending patent applications will result in the issuance of a patent or whether the examination process will require us to narrow our claims. As of December 31, 2014, we held 68 issued U.S. patents expiring between July 2019 and July 2033 and also had 127 U.S. patent applications pending. As of December 31, 2014, we also had 47 pending foreign patent applications and 12 foreign patents issued. Each foreign patent and foreign patent application is related to a U.S. patent or a pending U.S. patent application. Our patents may be contested, circumvented, found unenforceable or invalidated and we may not be able to prevent third parties from infringing them. Moreover, the rights granted under any issued patents may not provide us with proprietary protection or competitive advantages and, as a result, our competitors may be able to copy or develop technologies similar or superior to ours. In some countries where our processors are sold or may be sold, we do not have foreign patents or pending applications corresponding to some of our U.S. patents and patent applications. Even if foreign patents are granted, effective enforcement in foreign countries may not be available.

Protecting against the unauthorized use of our technology, trademarks and other proprietary rights is expensive and difficult. Litigation may be necessary in the future to enforce or defend our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Any such litigation could result in substantial costs and diversion of management resources, either of which could harm our business, financial condition, operating results and cash flows. Litigation also puts our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing. Additionally, any enforcement of our patents or other intellectual property may provoke third parties to assert counterclaims

 

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against us. Many of our current and potential competitors have the ability to dedicate substantially greater resources to enforcing their intellectual property rights than we have. We may not be able to prevent third parties from infringing upon or misappropriating our intellectual property.

Patent protection outside of the United States is generally not as comprehensive as in the United States and may not protect our intellectual property in some countries where our processors are sold or may be sold in the future. Even if patents are granted outside of the United States, effective enforcement in those countries may not be available. For example, the legal regime protecting intellectual property rights in China is relatively weak and it is often difficult to create and enforce such rights. Furthermore, we have historically only filed foreign patent applications in a limited number of countries and for only a relatively small subset of our U.S. patent application portfolio. Even so, we may not be able to effectively protect intellectual property rights in China or elsewhere, even if patents are granted for these filed, foreign applications. Many companies have encountered substantial intellectual property infringement in countries where we sell or intend to sell processors. If such an impermissible use of our intellectual property or trade secrets were to occur, our ability to sell our processors at competitive prices and to be a leading provider of processors may be adversely affected and our business, financial condition, operating results and cash flows could be materially and adversely affected.

We rely on the availability of third-party licenses.

Our products include intellectual property licensed from third parties, such as certain design technology, circuits and manufacturing rights for processor cores. It may be necessary in the future to renew these licenses or obtain additional licenses. We cannot assure you that the necessary licenses would be available on acceptable terms, or at all. Our failure to obtain, maintain and renew certain licenses or other rights on favorable terms, or at all, and our involvement in litigation regarding third-party intellectual property rights could have a material adverse effect on our business, financial condition, operating results and cash flows.

Our use of “open source” software presents risks that could have an adverse effect on our intellectual property rights and on our business.

We may use software licensed for use from third-party authors under open source licenses in certain of our products. Some open source licenses contain requirements that we make available source code for modifications or derivative works we create based upon the type of open source software we use. If we combine our proprietary software with open source software, we could, under certain open source licenses, be required to release the source code of our proprietary software to the public. This could allow our competitors to create similar products with lower development effort and in less time and result in a loss of product sales for us. It is possible that our use of open source software may trigger the foregoing requirements. Furthermore, there is a risk that such licenses could be construed in a manner that could impose unanticipated conditions or restrictions on our ability to commercialize our products. In such event, we could be required to seek licenses from third parties in order to continue offering our products, to re-engineer our products or to discontinue the sale of our products in the event re-engineering cannot be accomplished on a timely basis, any of which could materially and adversely affect our business, financial condition, operating results and cash flows.

Failure to comply with the U.S. Foreign Corrupt Practices Act (“FCPA”) and similar laws associated with our activities outside of the United States could subject us to penalties and other adverse consequences.

We face significant risks if we fail to comply with the FCPA and other anticorruption laws that prohibit improper payments or offers of payment to foreign governments and political parties by us for the purpose of obtaining or retaining business. In many foreign countries, particularly in countries with developing economies, it may be a local custom that businesses operating in such countries engage in business practices that are prohibited by the FCPA or other applicable laws and regulations. We cannot assure you that all of our employees and agents, as well as those companies to which we outsource certain of our business operations, will not take actions in violation of our policies and applicable law and for which we may be ultimately held responsible. Any

 

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violation of the FCPA or other applicable anticorruption laws could result in severe criminal or civil sanctions and, in the case of the FCPA, suspension or debarment from U.S. government contracting, which could have a material and adverse effect on our reputation, business, financial condition, operating results and cash flows.

We are subject to governmental export and import controls and economic sanctions laws that could subject us to liability and impair our ability to compete in international markets.

Because we incorporate U.S. origin technology into our processors, our processors are subject to U.S. export controls and may be exported or licensed outside of the United States only with the required level of export license or through an export license exception. If a transaction involves countries, individuals or entities that are the target of U.S. or other economic sanctions, licenses or other approvals from the U.S. Department of the Treasury’s Office of Foreign Assets Control or other sanctions authorities may be required and may not be granted. Various countries regulate the importation of certain encryption technology and have enacted laws that could limit our ability to distribute our processors or license our processor IP in such countries or could limit our OEMs’ ability to sell mobile devices incorporating our processors in those countries. Changes in our processors or changes in export or import or economic sanctions regulations may create delays in the introduction of our processors in international markets, prevent our OEMs with international operations from incorporating our processors in their products or, in some cases, prevent the export or import of our processors to certain countries altogether. Any change in export, import or economic sanctions regulations or related legislation, shift in approach to the enforcement or scope of existing regulations or change in the countries, persons or technologies targeted by these regulations could result in decreased use of our processors by, or in our decreased ability to export, license or sell our processors to, existing or potential OEMs with international operations. Failure to obtain required import or export approval for our processors or failure to comply with these regulations could result in penalties and restrictions on export privileges and could impair our ability to compete in international markets.

We, our OEMs and third-party contractors are subject to increasingly complex environmental regulations and compliance with these regulations may delay or interrupt our operations and adversely affect our business.

We face increasing complexity in our research and development and procurement operations as a result of requirements relating to the materials composition of many of our processors, including the European Union’s (“EU’s”) Restriction on the Use of Certain Hazardous Substances Directive, which restricts the content of lead and certain other substances in specified electronic products put on the market in the EU after July 1, 2006 and similar Chinese legislation relating to marking of electronic products which became effective in March 2007. Failure to comply with these laws and regulations could subject us to fines, penalties, civil or criminal sanctions and contract damage claims, which could harm our business, reputation and operating results. The passage of similar requirements in additional jurisdictions or the tightening of these standards in jurisdictions where our products are already subject to such requirements could cause us to incur significant expenditures to make our products compliant with new requirements, or could limit the markets into which we may sell our products. Other environmental regulations may require us to reengineer our processors to use components that are compatible with these regulations and this reengineering and component substitution may result in additional costs to us.

Some of our operations, as well as the operations of our CMs and foundries and other suppliers, are also regulated under various other federal, state, local, foreign and international environmental laws and requirements, including those governing, among other matters, the discharge of pollutants into the air and water, the management, disposal, handling, use, labeling of and exposure to hazardous substances and wastes and the cleanup of contaminated sites. Liability under environmental laws can be joint and several and without regard to comparative fault. We cannot assure you that violations of these laws will not occur in the future, as a result of human error, accident, equipment failure or other causes. Environmental laws and regulations have increasingly become more stringent over time. We expect that our products and operations will be affected by new environmental requirements on an ongoing basis, which will likely result in additional costs, which could adversely affect our business. Our failure to comply with present and future environmental, health and safety

 

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laws could cause us to incur substantial costs, result in civil or criminal fines and penalties and decreased revenue, which could adversely affect our operating results. Failure by our foundries or other suppliers to comply with applicable environmental laws and requirements could cause disruptions and delays in our product shipments, which could adversely affect our relations with our OEMs and adversely affect our business and results of operations.

As a result of efforts by us and our third-party contractors to comply with these or other future environmental laws and regulations, we could incur substantial costs, including those relating to excess component inventory, and be subject to disruptions to our operations and logistics. In addition, we will need to procure the manufacture of compliant processors and source compliant components from suppliers. We cannot assure you that existing laws or future laws will not have a material adverse effect on our business.

Risks related to the ownership of our common stock

The trading prices of our common stock could be volatile due to a number of factors.

The trading prices of our common stock have been highly volatile and could be highly volatile in the future due to a number of factors. For example, since our IPO, the closing sale prices of our common stock ranged from a low of $3.32 to a high of $22.36. In addition, following our announcement in October 2014 regarding the continued softness in demand for high-end smart phones incorporating our products and our expectation that we would not see a recovery in such high-end smart phones during the remainder of 2014, the trading price of our common stock declined significantly. Factors that could affect the trading price of our common stock, some of which are outside of our control, include the following:

 

    the gain or loss of significant OEMs or other developments involving our OEMs;

 

    recruitment or departure of key personnel;

 

    lawsuits threatened or filed against us;

 

    actual or anticipated changes in recommendations by any securities analysts who elect to follow our common stock;

 

    whether our operating results meet the expectations of investors or securities analysts;

 

    our failure to receive ongoing analyst coverage;

 

    adverse publicity and investors’ general perception of us;

 

    price and volume fluctuations in the overall stock market from time to time;

 

    significant volatility in the market price and trading volume of technology companies in general and of companies in our industry;

 

    variations in our operating results or those of our competitors or other companies perceived to be similar to us;

 

    actual or anticipated announcements of technological innovations, new services or service improvements, strategic alliances or significant agreements by us or by our competitors;

 

    level of sales in a particular quarter;

 

    changes in the estimates of our operating results;

 

    sales of large blocks of our stock or other changes in the volume of trading in our stock;

 

    major catastrophic events; and

 

    adoption or modification of regulations, policies, procedures or programs applicable to our business or our OEMs.

If the market for technology stocks or the stock market in general experiences loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, operating results or financial condition. The trading price of our common stock might also decline in reaction to events that affect

 

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other companies in our industry, even if these events do not directly affect us. Each of these factors, among others, could have a material adverse effect on your investment in our common stock.

We are involved in securities class action litigation and may be subject to similar litigation in the future. If the outcome of this litigation is unfavorable, it could have a material adverse effect on our business, financial condition, operating results and cash flows.

On September 13, 2012, a purported shareholder filed a class action complaint in the Superior Court of the State of California for Santa Clara County against us, the members of our board of directors, two of our executive officers and the underwriters of our IPO. On April 3, 2013, the outside members of the board of directors and the underwriters were dismissed without prejudice. An amended complaint was filed on February 25, 2013, which purports to be brought on behalf of a class of purchasers of our common stock issued in or traceable to the IPO. The amended complaint added additional shareholder plaintiffs and contains claims under Sections 11 and 15 of the Securities Act. The amended complaint seeks, among other things, compensatory damages, rescission and attorney’s fees and costs. On March 1, 2013, we and the other defendants responded to the amended complaint by filing a demurrer moving to dismiss the amended complaint on the ground that the court lacks subject matter jurisdiction. The court overruled that demurrer. On March 27, 2013, we and the other defendants filed a demurrer moving to dismiss the amended complaint on other grounds. The court denied the demurrer on September 4, 2013. On January 16, 2015, the court granted plaintiffs’ motion to certify a class. A trial has been scheduled for September 21, 2015.We believe that the allegations in the complaint are without merit and intend to vigorously contest the action. However, there can be no assurance that we will be successful in our defense and we cannot currently estimate a range of any possible losses we may experience in connection with this case. Accordingly, we are unable at this time to estimate the effects of this complaint on our business, financial condition, operating results and cash flows.

In the future, especially following periods of volatility in the market price of our shares, other purported class action or derivative complaints may be filed against us. The outcome of the pending and potential future litigation is difficult to predict and quantify and the defense of such claims or actions can be costly. In addition to diverting financial and management resources and general business disruption, we may suffer from adverse publicity that could harm our brand or reputation, regardless of whether the allegations are valid or whether we are ultimately held liable. A judgment or settlement that is not covered by or is significantly in excess of our insurance coverage for any claims, or our obligations to indemnify the underwriters and the individual defendants, could materially and adversely affect our business, financial condition, operating results and cash flows.

Our management has broad discretion as to the use of our cash and might invest or spend our cash in ways that may not yield a return.

Our management might not apply our cash in ways that increase the value of our common stock. We expect to use our cash for working capital and general corporate purposes, which may include acquisitions of complementary businesses, products or technologies. Our management might not be able to yield a significant return, if any, on any investment of our cash. The holders of our common stock may not have the opportunity to influence our decisions on how to use our cash. Until our cash is used, it may be placed in investments that do not produce significant income or lose value.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on any research and reports that securities or industry analysts publish about us or our business. A small number of securities analysts’ commenced coverage of us after the closing of our IPO. If one or more securities or industry analysts downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. For example, following our announcement in July 2014 that we believed demand from Samsung would decline as a

 

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result of end user demand for high-end smart phones, and our announcement in October 2014 regarding the continued softness in demand for high-end smart phones incorporating our products, securities analysts downgraded our stock and the trading price of our common stock declined significantly. If one or more of these analysts stops coverage of us or fails to publish reports on us regularly, demand for our stock could decrease which could cause our stock price and trading volume to decline.

Our actual operating results may differ significantly from our guidance and investor expectations, causing our stock price to decline.

From time to time, we may release guidance in our earnings releases, earnings conference calls or otherwise, regarding our future performance that represent our management’s estimates as of the date of release. If given, this guidance, which will include forward-looking statements, will be based on projections prepared by our management. Projections are based upon a number of assumptions and estimates that, while presented with numerical specificity, are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. The principal reason that we expect to release guidance is to provide a basis for our management to discuss our business outlook with analysts and investors. With or without our guidance, analysts and other investors may publish expectations regarding our business, financial performance and results of operations. We do not accept any responsibility for any projections or reports published by any such third persons. Guidance is necessarily speculative in nature and it can be expected that some or all of the assumptions of the guidance furnished by us will not materialize or will vary significantly from actual results. If our actual performance does not meet or exceed our guidance or investor expectations, the trading price of our common stock is likely to decline.

We are an “emerging growth company” and our election to delay adoption of new or revised accounting standards applicable to public companies may result in our financial statements not being comparable to those of other public companies. As a result of this and other reduced disclosure and governance requirements applicable to emerging growth companies, our common stock may be less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act, and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act (“Section 404”), reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We are electing to delay such adoption of new or revised accounting standards, and as a result, we may not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. As a result of such election, our financial statements may not be comparable to the financial statements of other public companies. We cannot predict if investors will find our common stock less attractive because we will rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile. We may take advantage of these reporting exemptions until we are no longer an emerging growth company. We will remain an emerging growth company upon the earliest of (i) January 1, 2018, (ii) the first fiscal year after our annual gross revenues are $1.0 billion or more, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities or (iv) as of the end of any fiscal year in which the market value of our common stock that is held by nonaffiliates exceeds $700 million as of the end of the second quarter of that fiscal year.

 

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If we experience material weaknesses or otherwise fail to maintain an effective system of internal control over financial reporting in the future, we may not be able to accurately report our financial condition, operating results or cash flows, which may adversely affect investor confidence in us and, as a result, the value of our common stock.

We are required, under Section 404, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for each year beginning with 2013. This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting and, once we are no longer an emerging growth company as defined in the JOBS Act, an opinion from our independent registered public accounting firm on the effectiveness of our internal control over financial reporting. A material weakness is a control deficiency, or combination of control deficiencies, in internal control over financial reporting that results in more than a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected on a timely basis.

Section 404 requires annual management assessments of the effectiveness of our internal control over financial reporting, starting with the Annual Report that we filed with the SEC for 2013. However, for as long as we remain an emerging growth company as defined in the JOBS Act, we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404. We may take advantage of these reporting exemptions until we are no longer an emerging growth company. We will remain an emerging growth company until the earliest of (i) January 1, 2018, (ii) the first fiscal year after our annual gross revenues are $1.0 billion or more, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities or (iv) as of the end of any fiscal year in which the market value of our common stock that is held by nonaffiliates exceeds $700 million as of the end of the second quarter of that fiscal year.

We cannot assure you that there will not be material weaknesses or significant deficiencies in our internal control over financial reporting in the future. Any failure to maintain internal control over financial reporting could severely inhibit our ability to accurately report our financial condition, operating results or cash flows. If we are unable to conclude that our internal control over financial reporting is effective, we would lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our common stock to decline. Our independent auditors will not be required to attest to their effectiveness while we are an emerging growth company under the JOBS Act. If our management and our independent auditors determine we have a material weakness or significant deficiency in our internal control over financial reporting, investors may lose confidence in us. Failure to remedy any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict our future access to the capital markets.

We incur increased costs and demands upon management as a result of complying with the laws and regulations affecting public companies, which could harm our operating results.

As a public company, we incur significant legal, accounting, investor relations and other expenses, including costs associated with public company reporting requirements. We also have incurred and will incur costs associated with current corporate governance requirements, including requirements under Section 404 and other provisions of the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, as amended (the “Dodd-Frank Act”), as well as rules implemented by the SEC and the NASDAQ Global Select Market. Although we may benefit from some of the disclosure and attestation deferrals for the period in which we remain an emerging growth company under the JOBS Act, we do not expect those deferrals to materially alter the costs and burdens we will experience as a public company. However, for as long as we remain an emerging growth company as defined in the JOBS Act, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy

 

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statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We may take advantage of these reporting exemptions until we are no longer an emerging growth company. We will remain an emerging growth company until the earliest of (i) January 1, 2018, (ii) the first fiscal year after our annual gross revenues are $1.0 billion or more, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities or (iv) as of the end of any fiscal year in which the market value of our common stock that is held by nonaffiliates exceeds $700 million as of the end of the second quarter of that fiscal year.

The expenses incurred by public companies for reporting and corporate governance purposes have increased dramatically over the past several years. We expect these rules and regulations to continue to increase our legal and financial compliance costs substantially and to make some activities more time consuming and costly. We are currently unable to estimate these costs with any degree of certainty. Greater expenditures may be necessary in the future with the advent of new laws and regulations pertaining to public companies. If we are not able to comply with these requirements in a timely manner, the market price of our stock could decline and we could be subject to sanctions or investigations by the SEC, the applicable stock exchange or other regulatory authorities, which would require additional financial and management resources. Because the JOBS Act has only recently been enacted, it is not yet clear whether investors will accept the more limited disclosure requirements that we may be entitled to follow while we are an emerging growth company. To the extent investors are not comfortable with a more limited disclosure regime, they may not be comfortable purchasing and holding our common stock if we elect to comply with the reduced disclosure requirements. We also expect that, as a public company, it will continue to be expensive for us to obtain director and officer liability insurance.

New disclosure requirements under the new provisions of the Dodd-Frank Act relating to “conflict minerals” could increase our costs and limit the supply of certain metals used in our products and affect our reputation with customers and stockholders.

The Dodd-Frank Act imposes new disclosure requirements regarding the use of certain minerals and metals, known as “conflict minerals,” mined from the Democratic Republic of the Congo and adjoining countries in products, whether or not these products are manufactured by third parties. These new requirements require us to engage in due diligence efforts beginning in 2013 to ascertain and disclose the origin of some of the raw materials used in our products. Despite litigation resulting in the limitation of certain requirements, initial disclosures were required no later than May 31, 2014, with subsequent disclosures required no later than May 31 of each following year. We incurred and expect to continue to incur costs associated with complying with these disclosure requirements, including due diligence to determine the sources of materials used in our products and other potential changes to our products, processes or sources of supply as a consequence of such due diligence. The implementation of these requirements and our compliance procedures could adversely affect the sourcing, supply and pricing of materials used in our products. As there may be only a limited number of suppliers offering “conflict free” minerals, we cannot be sure that the foundries that manufacture our products will be able to obtain sufficient quantities of materials from such suppliers or at competitive prices. Also, our reputation with our customers and our stockholders could be damaged if we determine that our products contain minerals not determined to be conflict free or if we are unable to sufficiently verify the origins for the materials used in our products through the procedures we may implement. If we cannot guarantee that all of our products exclude conflict minerals sourced from the Democratic Republic of the Congo or adjoining countries, certain of our customers may discontinue or reduce purchases of our products, which could materially and adversely affect our business, financial condition, operating results and cash flows.

Insiders have substantial control over us, which could limit your ability to influence corporate matters.

As of December 31, 2014, our directors, executive officers, principal stockholders and their affiliates beneficially owned, in the aggregate, approximately 39% of our outstanding common stock. As a result, these stockholders, if acting together, are able to exercise significant influence over all matters requiring stockholder

 

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approval, including the election of directors and approval of significant corporate transactions such as a merger or other sale of our company or our assets. In addition, these stockholders, if acting together, have the ability to exercise significant influence over the management and affairs of our company. This concentration of ownership could limit your ability to influence corporate matters and might harm the market price of our common stock by:

 

    delaying, deferring or preventing a change in corporate control;

 

    impeding a merger, consolidation, takeover or other business combination involving us; and

 

    discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us.

Our business could be negatively affected as a result of the actions of activist stockholders.

Responding to actions by activist stockholders can be costly and time-consuming, disrupting our operations and diverting the attention of management and our employees. Furthermore, any perceived uncertainties may lead to the perception of a change in the direction of our business or other instability, which may be exploited by our competitors, cause concern to our current or potential customers, and make it more difficult to attract and retain qualified personnel. If customers choose to delay, defer or reduce transactions with us or do business with our competitors instead of us because of any such issues, then our business, financial condition, operating results and cash flows would be adversely affected.

Provisions in our certificate of incorporation and bylaws and Delaware law might discourage, delay or prevent a change of control of us or changes in our management and therefore depress the trading price of our common stock.

Our certificate of incorporation and bylaws contain provisions that could depress the trading price of our common stock by acting to discourage, delay or prevent a change in control of our company or changes in our management that our stockholders may consider advantageous. These provisions:

 

    provide that directors may only be removed for cause;

 

    authorize the issuance of blank check preferred stock that our board of directors could issue to increase the number of outstanding shares and to discourage a takeover attempt;

 

    eliminate the ability of our stockholders to call special meetings of stockholders;

 

    prohibit stockholder action by written consent, which has the effect of requiring all stockholder actions to be taken at a meeting of stockholders;

 

    provide that the board of directors is expressly authorized to make, alter or repeal our bylaws; and

 

    establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change in control of us by prohibiting stockholders owning in excess of 15% of our outstanding voting stock from merging or combining with us.

Any provision of our certificate of incorporation, our bylaws or Delaware law that has the effect of discouraging, delaying or preventing a change in control of us could limit the opportunity for our stockholders to receive a premium for their shares of our common stock and could also affect the price that some investors are willing to pay for our common stock.

We do not expect to pay dividends for the foreseeable future.

We have never declared or paid any cash dividends on our common stock and do not anticipate paying any cash dividends for the foreseeable future. We expect to retain all of our future earnings for use in the development of our business and for general corporate purposes. Any determination to pay dividends in the

 

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future will be at the discretion of our board of directors. Consequently, investors may need to rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends should not purchase our common stock.

 

Item 1B. Unresolved Staff Comments

None.

 

Item 2. Properties

Our principal administrative and research and development facility is located at our headquarters in Mountain View, California where we currently lease approximately 87,565 square feet of office space. Our lease for this facility commenced during the fourth quarter of 2013 with a term of ten years expiring on October 31, 2023 with an option to extend for an additional five years. We had a lease for approximately 28,561 square feet of office space for sales, marketing, customer support and administrative functions in Mountain View, California that expired on January 20, 2014. In addition, we lease office space in Scotts Valley, California, Lafayette, Colorado and India for research and development. We also lease sales offices in China, South Korea, Taiwan and Singapore.

We believe that our existing properties are in good condition and are sufficient and suitable to meet our current needs. We intend to add new facilities or expand existing facilities as we add employees or expand our markets and we believe that suitable additional space will be available as needed to accommodate any such expansion of our operations.

 

Item 3. Legal proceedings

From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. We have received, and may in the future continue to receive, claims from third parties asserting infringement of their intellectual property rights. Future litigation may be necessary to defend ourselves and our customers by determining the scope, enforceability and validity of third party proprietary rights or to establish our proprietary rights. We have also received a complaint which purports to be brought on behalf of a class of purchasers of our common stock issued in or traceable to our IPO which contains claims under Sections 11, 12(a)(2) and 15 of the Securities Act. There can be no assurance with respect to the outcome of any current or future litigation brought against us or pursuant to which we have indemnification obligations and the outcome could have a material adverse impact on our business, financial condition, operating results and cash flows.

On September 13, 2012, a purported shareholder filed a class action complaint in the Superior Court of the State of California for Santa Clara County against us, the members of our board of directors, two of our executive officers and the underwriters of our IPO. An amended complaint was filed on February 25, 2013, which purports to be brought on behalf of a class of purchasers of our common stock issued in or traceable to the IPO. On April 3, 2013, the outside members of the board of directors and the underwriters were dismissed without prejudice. The amended complaint added additional shareholder plaintiffs and contains claims under Sections 11 and 15 of the Securities Act. The complaint seeks, among other things, compensatory damages, rescission and attorney’s fees and costs. On March 1, 2013, defendants responded to the amended complaint by filing a demurrer moving to dismiss the amended complaint on the ground that the court lacks subject matter jurisdiction. The court overruled that demurrer. On March 27, 2013, defendants filed a demurrer moving to dismiss the amended complaint on other grounds. The Court denied the demurrer on September 4, 2013. On January 16, 2015, the court granted plaintiff’s motion to certify a class. A trial has been scheduled for September 15, 2015. We believe that the allegations in the complaint are without merit and intend to vigorously contest the action. However, there can be no assurance that we will be successful in our defense and we cannot currently estimate a range of any possible losses we may experience in connection with this case. Accordingly, we are unable at this time to estimate the effects of this complaint on our business, financial condition, operating results or cash flows.

 

Item 4. Mine Safety Disclosures

Not applicable.

 

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PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock has been listed on the NASDAQ Global Select Market under the trading symbol “ADNC” since May 10, 2012. Prior to that date, there was no public trading market for our common stock. For 2014 and 2013, the following table sets forth for the periods indicated the high and low sales prices per share of our common stock as reported on the NASDAQ Global Select Market:

 

     Fiscal 2014      Fiscal 2013  
     High      Low      High      Low  

First Quarter

   $ 13.59      $ 9.84       $ 16.45      $ 8.87   

Second Quarter

   $ 13.11      $ 11.10       $ 16.91      $ 12.43   

Third Quarter

   $ 12.27      $ 7.21       $ 13.70      $ 9.25   

Fourth Quarter

   $ 7.83       $ 3.17       $ 12.88      $ 8.86   

On December 31, 2014, the last reported sale price of our common stock on the NASDAQ Global Select Market was $4.40. As of February 27, 2015 we had 43 holders of record of our common stock (not including beneficial owners of stock held in street name).

We have never declared or paid cash dividends on our common or preferred stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any cash dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our Board of Directors and will depend on our financial condition, results of operations, capital requirements, general business conditions and other factors that our Board of Directors may consider relevant.

Our equity plan information required by this item is incorporated by reference to the information in Part III, Item 12 of this Annual Report.

Performance Graph

This performance graph shall not be deemed to be “soliciting material” or “filed” or incorporated by reference in future filings with the Securities and Exchange Commission, or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) except as shall be expressly set forth by specific reference in such filing.

 

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The following graph shows a comparison from May 10, 2012 (the date our common stock commenced trading on the NASDAQ Global Select Market) through December 31, 2014 of the cumulative total return for our common stock, the NASDAQ Composite Index and the Philadelphia Semiconductor Index. Such returns are based on historical results and are not intended to forecast or be indicative of possible future performance of our common stock. Data for the NASDAQ Composite Index and the Philadelphia Semiconductor Index assume reinvestment of dividends.

 

LOGO

 

CUMULATIVE
TOTAL RETURN
  5/10/2012     6/30/2012     9/30/2012     12/31/2012     3/31/2013     6/30/2013     9/30/2013     12/31/2013     3/31/2014     6/30/2014     9/30/2014     12/31/2014  

Audience, Inc

    100.00        100.94        32.46        54.40        79.84        69.16        58.85        60.94        65.45        62.62        38.74        23.04   

NASDAQ Composite-Total Returns

    100.00        98.28        103.51        99.22        113.04        118.15        131.38        146.02        147.23        155.05        158.52        167.55   

Philadelphia Semiconductor Index

    100.00        91.65        97.40        101.64        113.36        122.09        128.72        140.92        155.17        168.92        170.43        185.25   

Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

 

Item 6. Selected Financial Data

The following selected consolidated financial and other data should be read in conjunction with, and are qualified by reference to, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our audited consolidated financial statements and the accompanying notes included elsewhere in this report.

We derived our selected consolidated statements of operations data for 2014, 2013 and 2012 and our consolidated balance sheet data as of December 31, 2014 and 2013 from our audited consolidated financial statements and related notes included elsewhere in this Annual Report. We derived our selected consolidated statements of operations data for 2011 and 2010 and our selected consolidated balance sheet data as of December 31, 2012, 2011 and 2010 from our audited consolidated financial statements and related notes that are not included in this Annual Report. Historical results are not necessarily indicative of future results.

 

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     Year Ended December 31,  
     2014 (2)     2013     2012     2011     2010  
     (in thousands, except per share data)  

Selected consolidated statements of operations data:

          

Revenue:

          

Hardware

   $ 104,123     $ 150,010      $ 107,267     $ 97,668      $ 47,920   

Licensing

     9,217       10,121        36,638       —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

  113,340     160,131      143,905     97,668      47,920   

Cost of revenue (1)

  56,572     71,267      62,247     45,707      19,314   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

  56,768     88,864      81,658     51,961      28,606   

Operating expenses:

Research and development (1)

  50,613     43,256      31,520     21,578      11,445   

Selling, general and administrative (1)

  46,153     41,346      35,271     21,237      12,217   

Impairment of goodwill and intangible assets

  31,336     —        —        —        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

  128,102     84,602      66,791     42,815      23,662   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

  (71,334 )   4,262      14,867     9,146      4,944   

Interest income (expense), net

  38     157      164     (8   (17

Other expense, net

  (347 )   (280   (586 )   (843   (139
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

  (71,643 )   4,139      14,445     8,295      4,788   

Income tax provision (benefit)

  1,968     2,069      (1,152 )   —        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

$ (73,611 ) $ 2,070    $ 15,597   $ 8,295    $ 4,788   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share:

Basic

$ (3.25 ) $ 0.10    $ 0.73   $ 0.16    $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

$ (3.25 ) $ 0.09    $ 0.65   $ 0.14    $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares used in computing net income (loss) per share:

Basic

  22,683     21,467      13,377     948      620   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  22,683     23,197      15,687     3,384      620   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     December 31,  
     2014 (2)      2013      2012      2011     2010  
     (in thousands)  
Selected consolidated balance sheet data:                                  

Cash, cash equivalents and short-term investments

   $ 55,183      $ 139,546       $ 127,638      $ 15,983      $ 12,095  

Working capital

     79,680        146,242         132,951        34,696        25,073  

Total assets

     114,842        179,419         170,859        49,865        36,741  

Total liabilities

     17,559        20,038         24,924        13,962        10,758  

Capital stock

     195,374        183,862         172,482        78,081        76,397  

Total stockholders’ equity (deficit)

     97,283        159,381         145,935        (38,445     (48,365 )

 

(1) Includes stock-based compensation expense as follows:

 

     Year Ended December 31,  
     2014      2013      2012      2011      2010  
     (in thousands)  

Cost of revenue

   $ 338      $ 305       $ 150      $ 90       $ 62   

Research and development

     3,449        2,166         1,023        416         227   

Selling, general and administrative

     4,001        3,189         1,961        884         258   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $     7,788      $   5,660       $      3,134      $       1,390       $      547   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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(2) On July 11, 2014, we acquired Sensor Platforms for approximately $41 million. As part of the purchasing accounting, $20.7 million was allocated to goodwill and $19.0 million was allocated to intangible assets, of which $18.0 million related to developed technology and $1.0 million related to customer relationships. As a result of a significant drop in the trading prices of our common stock in the public stock market during the three months ended December 31, 2014, we performed impairment analyses on both our goodwill and long-lived assets as of November 1, 2014. Based on the results of the impairment analyses, we recorded impairment charges of $20.7 million for goodwill, $10.5 million for the developed technology intangible asset and $0.1 million for the customer relationships intangible asset. The total impairment charge of $31.3 million is shown as a separate line item in operating expenses.

 

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Item 7. Management’s discussion and analysis of financial condition and results of operations

The following discussion and analysis of our financial condition and results of our operations should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the sections titled “Risk factors” and “Special note regarding forward-looking statements and industry data” included elsewhere in this Annual Report on Form 10-K.

Overview

We are a leading provider of intelligent voice and audio solutions that improve voice quality and the user experience in mobile devices. We collaborate with leading auditory neuroscientists to understand the human auditory system and have developed purpose-built processors that combine science and technology to function like human hearing. Our low power, hardware-accelerated DSPs and audio codecs and associated algorithms substantially improve sound quality and suppress noise in mobile devices. As the primary driver of the mobile device market, the mobile phone continues to play an increasingly prominent role in peoples’ lives. Voice communication is a primary function of mobile phones, and we expect voice to increasingly complement touch as a core user interface, heightening the importance of voice and audio quality in mobile devices.

We recorded total revenue of $113.3 million, $160.1 million and $143.9 million for 2014, 2013 and 2012, respectively. We recorded a net loss of $73.6 million for 2014 and net income of $2.1 million and $15.6 million for 2013 and 2012, respectively.

On July 11, 2014, we completed our acquisition of Sensor Platforms. Sensor Platforms develops software and algorithms that interpret sensor data to enable broad context awareness on smart phones, wearables and other consumer devices. We believe the combination of Sensor Platforms’ motion sensing technology with our voice and audio solutions places the combined company in a unique position to deliver compelling solutions based on the fusion of voice and motion.

We work with OEMs to have our voice and audio processors and, more recently, software designed into their products, which we refer to as design wins. We generally sell our voice and audio processors directly to OEMs and their CMs on a purchase order basis. We also sell a small portion of our products indirectly to OEMs through distributors. For a single OEM, we also license processor IP, which that OEM has integrated into certain of its mobile phones, and we began to recognize royalty revenue for the use of our processor IP from this OEM in 2012. In addition, we currently license software that interprets sensor data related to the motion of mobile devices and have announced our first stand-alone software product that improves sound quality and suppresses background noise. Our OEMs’ products are complex and require significant time to design, launch and ramp to volume production. As a result, our sales cycle is lengthy. We typically commence commercial shipments of our products up to one year following a design win. Because the sales cycle for our products is long, we incur expenses to develop and sell our products, regardless of whether we achieve a design win and well in advance of generating revenue, if any. In addition, achieving a design win from an OEM does not ensure that the OEM will begin producing the related product in a timely manner, if at all, or that the design win will ultimately generate additional revenue for us.

Although we have been impacted by softness in demand for certain high-end smart phones sold by our largest OEM, we intend to continue to invest in projects to support future revenue growth and revenue diversification.

We anticipate that our operating results will continue to fluctuate and be subject to consumer demand for high-end smart phones and anticipate that reductions in demand by our large OEM customers will continue to have a disproportionate impact on our results.

 

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Business factors affecting our performance

Competition in market for voice and audio improvement. The market for our products is evolving rapidly and is technologically challenging. Our success will depend, in part, on growth of this market, our ability to adapt to demands from users, OEMs and MNOs, and our ability to remain competitive in the industry. OEMs and MNOs may decide that the costs of improving sound quality outweigh the benefits, which could limit demand for our solutions. User demand for new levels of voice and audio quality and functionality will depend on our ability to provide solutions that continue to improve the user experience and our ability to convey the impact of our solutions.

Design wins. We closely monitor design wins by OEMs and their mass production releases because we consider these to be important indicators of future revenue. The revenue that we generate from each design win can vary significantly and in some cases, our OEMs may cancel projects for which we have been awarded a design win. Our long-term sales expectations are based on forecasts from OEMs and internal estimations of demand factoring in the expected time to market for final mobile devices incorporating our solutions and associated revenue potential. Our ability to implement our product roadmap and introduce new products will facilitate the adoption of our solutions into future generations of mobile devices.

We estimate the life cycle of our OEMs’ mobile devices on the basis of our history with the OEM, the type of mobile device and discussions with our OEMs. A given design win can generate a wide range of sales volumes for our products, depending on the market demand for our OEMs’ mobile devices. The market demand for our OEMs’ mobile devices, in turn, can depend on a number of factors, including the reputation of the OEM, the geographic markets in which the OEM intends to introduce the mobile devices and whether the MNOs on whose networks the mobile devices are designed to operate provide marketing and subsidies for the mobile devices.

Revenue driven by significant customers. Historically, our revenue has been significantly concentrated in a small number of OEMs, CMs and distributors and we expect that concentration to continue for the foreseeable future. Revenue from Samsung and Comtech, a distributor who sells our products to end customers including Xiaomi, accounted for 75% and 11%, respectively, of total revenue for 2014. Revenue from Samsung, Apple and Comtech accounted for 63%, 21% and 11%, respectively, of total revenue for 2013. Revenue from Samsung, Apple and Foxconn accounted for 48%, 27% and 14%, respectively, of total revenue for 2012. With respect to its 2011 model of its mobile phone, we began to recognize licensing revenue in 2012 as Apple transitioned from the purchase of our processors to the licensing of our processor IP for a royalty. No other OEM, CM or distributor accounted for 10% or more of our total revenue for 2014, 2013 or 2012.

Fluctuations in the demand for the products of our OEMs have a significant impact on our business as our OEMs reduce their purchase orders with us in response to such demands and competitive pressures. For example, we announced in July 2014 and October 2014 that weakness in demand for certain high-end smart phones was anticipated to cause a decline in the volume of processors purchased from us by Samsung, and that such weakness in demand was expected to continue. As a result, we expect that we will continue to incur net losses in 2015. We anticipate that fluctuations in demand for high-end smart phones and concentration of revenue in one or more OEMs will continue in the short-term and that we may not be able to foresee slowing demand early enough to take action to control our expenses. As a majority of our expenses, other than the cost of manufacturing our processors, are staff-related, a reduction in those expenses may be delayed in having an effect on our operating results. For example, in August 2014, we announced and implemented a restructuring plan for a workforce reduction through involuntary terminations. We may also impair our ability to grow our revenue in the future if our expense cuts cause us to forego development of future programs.

While we strive to expand and diversify our OEM base and expect our customer concentration to decline over time, we anticipate that sales to a limited number of OEMs will continue to account for a significant percentage of our total revenue for the foreseeable future. Our customer concentration may cause our financial

 

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performance to fluctuate significantly from period to period based on the device release cycles and seasonal sales patterns of these OEMs and the success of their products. The loss of or any significant decline in sales to these OEMs may have an adverse effect on our financial condition and results of operations.

Pricing and gross margins of our products. Our gross margin has been and will continue to be affected by a variety of factors, including the timing of changes in selling price, shipment volumes, new product introductions, changes in OEM concentration and product mixes, changes in our purchase price of fabricated wafers and assembly and test service costs and inventory write-downs, if any. In general, products with higher performance and a higher number of features tend to be priced higher and have higher gross margins. We expect our gross margin to fluctuate over time, in part from the impact of competitive pricing pressure. Erosion of average selling prices as products mature is typical in the semiconductor industry. Consistent with this historical trend, we expect that the average selling prices of our products will decline as they mature. As a normal course of business, we will seek to offset the effect of declining average selling prices on existing products by reducing manufacturing costs and introducing new and higher value-added products. If we are unable to maintain overall average selling prices, our gross margin will decline.

Relationships with MNOs. MNOs can help determine product specifications for OEM products, thereby influencing the design and components selected by OEMs. We have invested and continue to invest significant resources in working with MNOs to increase awareness of the potential and benefits of our processors. We intend to continue our work with MNOs to educate them about the impact of sound quality on the user experience. However, MNOs may not continue to value additional improvements in sound quality that our products can provide and may not require their OEMs to meet certain sound quality specifications.

General economic conditions and geographic concentration. A global economic slowdown or financial crisis, similar to the one that occurred beginning in late 2008, would likely have a significant impact on the mobile device industry and our financial results. As the economy slows, consumer confidence may decline and, because our products serve the mobile device market, any decline in purchases by consumers of new mobile devices would adversely affect our revenue. Moreover, because our sales have been concentrated in a few select markets, including South Korea, China and the U.S., our financial results will be impacted by general economic and political conditions in these markets.

Components of our results of operations

Revenue

To date, we have generated hardware revenue from sales of our processors and codecs and we expect the sale of our processors to continue to represent the substantial majority of our revenue. For certain OEMs, we ship our voice and audio processors directly and recognize revenue at the time of delivery and title transfer. The transfer of risk and reward of ownership to customers is typically complete at the time of shipments as per our shipping terms. We also ship a small portion of our products to our distributors under our shipping terms. These distributors tend to buy from us at the request of specific OEMs, and we recognize revenue on sales to distributors when the distributor notifies us in writing of the final resale of our products.

We anticipate that in the future as significant OEMs prepare worldwide launches of their products, we may see substantial increases in revenue shortly before the launch. We also anticipate that for some period before the OEM begins building new inventory for the new mobile device or following the launch, we may see reductions in revenue related to our products incorporated in prior generations of devices, as the OEMs reduce their inventories of those products.

Under a license agreement we entered into in 2008, we began to recognize licensing revenue on royalty payments in the first quarter of 2012. As part of our 2008 license agreement, we are entitled to receive a royalty fee for each 2011 model of mobile device that is sold incorporating our processor IP. For the 2012 and 2013

 

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models of this mobile device, we are entitled to receive a royalty fee that depends upon whether our processor IP is incorporated and/or enabled in units sold. We entered into an additional license agreement in 2010 relating to a new generation of our processor IP. We do not expect to offer this arrangement to other OEMs. However, in 2014, we introduced our first software product and anticipate that it, as well as the acquisition of certain software products from Sensor Platforms, may lead us to recognize additional licensing revenue in the future.

We recognize licensing revenue on the basis of the number of mobile phones sold that incorporate our processor IP and for which a royalty payment is received by us. We are reliant on the accuracy of quarterly OEM shipment reports, which we typically receive within 45 days after the OEM’s fiscal quarter end, in order to calculate royalties owed to us and recognize our licensing revenue. Our licensing revenue will lag the sales of mobile phones that integrate our processor IP by one quarter. For example, although mobile phones integrating our processor IP commenced shipping in the three months ended December 31, 2011, we did not recognize license revenue related to those mobile devices until the three months ended March 31, 2012. We have limited rights to audit the shipment data we receive, which limits our ability to verify calculated licensing revenue or seek redress for reports we believe are not accurate and we have limited experience in testing and evaluating the accuracy of the data we receive.

We maintain sales operations, which include our direct sales force, third-party sales representatives and distributors, in Asia, North America, and Europe. Substantially all of our revenue has been generated by sales to CMs and OEMs that manufacture their products in Asia and we expect sales to such CMs and OEMs in Asia to contribute a majority of our revenue in the foreseeable future. Because our OEMs market and sell their products worldwide, our revenue by geographic location is not necessarily indicative of where mobile device sales occur, but rather of where their manufacturing operations occur. Since our inception, our sales in Asia have represented substantially all of our hardware revenue.

Cost of revenue and gross margin

The largest components of our cost of revenue are costs of materials and outsourced manufacturing costs for the fabrication, assembly, packaging and test of our voice and audio processors. To a lesser extent, cost of revenue also includes expenses relating to cost of personnel, stock-based compensation, logistics and quality assurance, royalty expense, shipping, an allocation of overhead and provisions for excess and obsolete inventories, if any. Additionally, cost of revenue also includes the amortization of the developed technology intangible asset that we recorded as part of the purchase price accounting associated with the acquisition of Sensor Platforms in July 2014 (see Note 5 to our consolidated financial statements included in this Annual Report for additional information). We intend to continue to manage our cost of revenue through both cost improvements and economies of scale.

We expect our gross margins to fluctuate over time depending on the mix of newer, higher margin products and older products, whose margins have declined over time, as well as the mix between sales of processors, royalties from the license of processor IP, and sales of software. In general, new products with higher performance and more features tend to be priced higher and have higher gross margins. Consistent with trends in the semiconductor industry, we have reduced the price of certain of our products over time and may continue to do so in the future. As a normal course of business, we seek to offset the effect of declining average selling prices by reducing manufacturing costs of existing products and introducing new and higher value-added products. The license of our processor IP does not require the manufacture, assembly, packaging, test or shipment of integrated circuits, resulting in higher gross margins than for the sale of stand-alone processors.

Operating expenses

We classify our operating expenses as either research and development or selling, general and administrative. Personnel-related costs, including salaries, benefits, bonuses and stock-based compensation, are the most significant component of each of our operating expense categories. In any particular period, the timing of additional hires could materially affect our operating expenses.

 

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Research and development. Our research and development expenses consist primarily of personnel-related costs for the design and development of our products and technologies. Additional research and development expenses include nonrecurring engineering expenses, product prototypes, external test and characterization expenses, depreciation, amortization of design tool software licenses and allocated overhead expenses. We also outsource portions of our research and development activities. We record all research and development expenses as incurred, except for capital equipment and internally developed software, which we depreciate and amortize over their estimated useful lives. We have engineering development teams in the United States and India.

Selling, general and administrative. Selling, general and administrative expenses consist primarily of personnel-related costs for our sales, business development, marketing, applications engineering, executive, finance and human resources activities. Additionally, selling, general and administrative expenses include promotional and other marketing expenses, third-party sales representative commissions, travel, professional fees, depreciation, allocated overhead expenses, and the amortization of the customer relationship intangible asset recorded as part of the purchase price accounting associated with the acquisition of Sensor Platforms in July 2014. Professional fees principally consist of legal, audit, tax and accounting consultation services.

Impairment of Goodwill and Intangible Assets. As a result of a significant drop in the trading prices of our common stock in the public stock market during the three months ended December 31, 2014, we performed impairment analyses on both our goodwill and long-lived assets as of November 1, 2014. Based on the results of the impairment analyses, we recorded an impairment charge of $31.3 million, which was comprised of $20.7 million for goodwill, $10.5 million for the developed technology intangible asset and $0.1 million for the customer relationship intangible asset. See Note 6 to our consolidated financial statements included in this Annual Report for additional information.

The impairment charge is shown as a separate line item in the operating expenses section of our Consolidated Statements of Operations.

Other expense, net

Although a majority of our sales are outside of the United States, we incur a substantial majority of our expenses and receive all of our revenue in U.S. dollars. As a result, our foreign currency related expense and income have not been material to date.

Income tax provision

Our effective tax rate in the periods presented on or after January 1, 2012 is the result of the mix of income earned in various tax jurisdictions that apply a broad range of income tax rates. The rate at which the provision for income taxes is calculated also differs from the U.S. federal statutory income tax rate primarily due to the partial valuation allowance on U.S. deferred tax assets and different tax rates in foreign jurisdictions where income is earned and considered to be indefinitely reinvested.

Our effective tax rate may be affected by such factors as future changes in the realizability of our U.S. deferred tax assets, changes in tax laws, regulations or rates, changes in interpretation of existing laws or regulations, the impact of accounting for stock-based compensation, changes in our international organization, resolution of unrecognized tax benefits and shifts in the amount of income before tax earned in the United States as compared with other regions in the world.

Backlog

We do not believe that our backlog as of any particular date is meaningful, as our sales are made primarily pursuant to purchase orders. Only a small portion of our orders is noncancelable, and the dollar amount associated with the noncancelable portion is not significant.

 

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Critical accounting policies and estimates

Our consolidated financial statements and the related notes included elsewhere in this Annual Report are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require our judgment in its application. In other cases, our judgment is required in selecting among available alternative accounting policies that allow different accounting treatment for similar transactions. The preparation of our consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of our assets, liabilities, revenue, costs and expenses and related disclosures. We base our estimates on our historical experience and various other assumptions that we believe are reasonable under the circumstances. Our actual results could differ significantly from the estimates we make. To the extent that there are differences between our estimates and our actual results, our future financial statement presentation, financial condition, operating results and cash flows would be affected. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving our judgments and estimates.

Revenue recognition

We derive hardware revenue from the direct sale of processors and codecs to CMs and OEMs and indirect sales of processors and codecs to OEMs through distributors. We recognize revenue from sales to CMs and OEMs when persuasive evidence of an arrangement exists, the selling price is fixed or determinable, product delivery has occurred, which is when the risk and reward of ownership pass to the customer, and collectability of the resulting receivable is reasonably assured. The transfer of risk and reward of ownership to the customers is typically met at the time of shipment as per our shipping terms. We had insignificant revenue from sales of our software products.

We do not offer CMs, OEMs or distributors return rights, rebates, price protection or other similar rights. However, in the past, we have occasionally accepted returns from distributors. As a result, product revenue is deferred until the distributor notifies us in writing of its resale of the products. Although we do not recognize hardware revenue from sales to our distributors upon shipment, the title and the risk of ownership for the products typically transfers to the distributor upon shipment as per our shipping terms, and the distributor is obligated to pay for the products at that time. Deferred revenue less the related cost of the inventories are included in our consolidated balance sheets under “Deferred credits and income.” We take into account the inventories held by our distributors in determining the appropriate level of provision for excess and obsolete inventory.

With respect to a single OEM, we provide rights to integrate certain of our processor IP into its mobile devices. This OEM has agreed to pay royalties based on its sales of mobile devices integrating and enabling our processor IP. Sales of mobile phones integrating our licensed processor IP began in the three months ended December 31, 2011 and we began to recognize licensing revenue in the three months ended March 31, 2012. We earn royalties on mobile phones integrating and enabling our licensed processor IP at the time of sale. We recognize licensing revenue based on mobile phone shipments reported during the quarter in which we receive the report, assuming that all other revenue recognition criteria are met at that time because we do not have other evidence to reasonably estimate the amount of royalties due. This OEM generally reports shipment information typically within 45 days following the end of their quarter. Since there is no reliable basis on which we can estimate our licensing revenues prior to obtaining the OEM’s reports, we recognize licensing revenues one quarter in arrears. The amount of revenue recognized is determined by multiplying the number of mobile phones sold during a particular quarter in which our processor IP is integrated by the agreed-upon royalty rate. We are reliant on the accuracy of shipment reports from this OEM in order to calculate our licensing revenue.

Inventory

Our inventory consists primarily of completed wafers, processors being assembled or tested by third parties and finished processors. We state our inventories at the lower of cost or market value, cost determined under the

 

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first-in, first-out method. We routinely evaluate quantities and values of inventory in light of current market conditions and market trends and record provisions for inventories in excess of demand and subject to obsolescence, if necessary. This evaluation may take into consideration expected demand, new product development schedules, the effect new products might have on the sale of existing voice and audio processors, product obsolescence, product merchantability and other factors.

We also regularly review the cost of inventories against their estimated market value and record a provision for inventories that have a cost in excess of estimated market value in order to carry those inventories at the lower of cost or market value. The recording of these provisions establishes a new and lower cost basis for each specifically identified inventory item. Once specific inventories have been written-down, we do not restore the cost basis to its original level regardless of any subsequent changes in facts or circumstances. Recoveries of value against previously written-down specific inventories are only recognized upon their future sale.

Goodwill

Goodwill represents the excess of the cost of an acquisition over the sum of the amounts assigned to tangible and identifiable intangible assets acquired less liabilities assumed.

We evaluate goodwill, at a minimum, on an annual basis and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. We perform our annual goodwill impairment test as of October 1 of each year. Our annual impairment test as of October 1, 2014 did not result in an impairment of goodwill.

We evaluate goodwill using a two-step process. First, impairment of goodwill is tested at the reporting unit level by comparing the reporting unit’s carry amount (book value), including goodwill, to the fair value of the reporting unit. We have only one reporting unit for the purposes of testing goodwill for impairment. If the carrying amount of the reporting unit exceeds its fair value, a second step is performed to measure the amount of impairment loss, if any. In step two, we calculate the implied fair value of goodwill as the excess of the fair value of a reporting unit over the fair values assigned to its assets and liabilities. If the implied fair value of goodwill is less than the carrying value of the reporting unit’s goodwill, we recognize the difference as an impairment charge.

As a result of a significant drop in the trading prices of our common stock in the public stock market during the three months ended December 31, 2014, we performed impairment analyses on both our goodwill and long-lived assets as of November 1, 2014. To determine the fair value of the reporting unit for the goodwill impairment analysis, we used the market approach whereby we considered our market capitalization, as determined by the trading prices of our capital stock in the public stock market, and control premiums for acquisition-related transactions in our industry.

In the first step of our November 1, 2014 goodwill impairment analysis, we determined that the carrying amount of our reporting unit exceeded the fair value of our reporting unit. After completing the second step of our impairment analysis, we recognized a goodwill impairment charge of $20.7 million. As a result of the charge, we did not have any goodwill on our consolidated balance sheet at December 31, 2014.

Long-Lived Assets

Long-lived assets such as intangible assets subject to amortization and property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable from their future cash flows. The assets evaluated for impairment are grouped, based on our judgment, with other assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. If the sum of the estimated undiscounted cash flows is less than the carrying value of the assets, the assets will be written down to their estimated fair value.

 

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As a result of our impairment analysis performed as of November 1, 2014, we recorded an impairment charge of $10.6 million related to the write-down of our developed technology intangible asset and customer relationship intangible asset.

The undiscounted cash flows were determined at the asset group level (which was determined to be equal to the reporting unit level) using the income approach. In applying the income approach, we made certain assumptions as to the amount and timing of future expected cash flows. The amount and timing of future cash flows was based on our most recent long-term forecast of our expected future financial performance, including projections of revenues, cost of revenue, operating expenses, income taxes, depreciation and amortization expense, working capital requirements and capital expenditures. The terminal value, which represents the estimated value of cash flows beyond the last projected period in our analysis, was calculated using the market multiple approach and reflects our best estimate of the exit value under the recoverability test.

We determined the fair values of the developed technology intangible assets using the royalty relief method. In applying the royalty relief method, we made certain assumptions as to the amount and timing of future expected royalty savings and the appropriate discount rate. The amount and timing of future expected royalty savings is based on our projections of future revenues to be derived from existing technology and in-process research and development, costs to complete in-process research and development, royalty rates based on arm’s length royalty agreements and income taxes. The discount rate was based on the risk adjusted discount rate related to the developed technology.

The new carrying value of the developed technology intangible asset is being amortized over the remaining estimated useful life of the asset, which we determined to be approximately two years.

Accounting for income taxes

In accordance with the authoritative guidance for income taxes, we make certain estimates and judgments in determining the income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of tax credits, benefits and deductions, as well as the interest and penalties relating to these uncertain tax positions. Estimates and judgments also occur in the recording of deferred tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense between tax and financial statement reporting. Significant changes to these estimates may increase or decrease our provision for income taxes in a subsequent period. Similarly, for tax liabilities denominated in a currency other than the U.S. dollar, changes in the value of the denominated currency may increase or decrease our tax provision in a subsequent period.

The calculation of our tax liabilities involves the assessment of uncertainties in the application of complex tax regulations. We recognize liabilities for uncertain tax positions based on a two-step process – recognition and measurement. In the first step, we determine whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The second step addresses measurement of a tax position that meets the more-likely-than-not criterion. The tax position is measured at the largest amount of benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Because we are required to determine the likelihood of various possible outcomes, these estimates are inherently difficult and subjective. We reevaluate these uncertain tax positions on a quarterly basis. This reevaluation is based on factors including, but not limited to, changes in facts or circumstances and tax laws. A change in recognition or measurement would result either in the recognition of a tax benefit or in an increase in the tax provision for the period.

We also assess the likelihood that we will be able to realize our deferred tax assets. In order for us to realize our deferred tax assets, we must be able to generate sufficient taxable income in those jurisdictions where the deferred tax assets are located. We record a valuation allowance to reduce our deferred tax assets to the amount that is more-likely-than-not to be realized. In determining the need for a valuation allowance, we consider historical losses, recent earnings, forecasted income, customer concentration, pricing pressure, competition from larger companies with significantly greater resources, and other risks inherent in the semiconductor industry. In

 

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the event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to earnings in the period in which we make such a determination. Likewise, if we later determine that it is more-likely-than-not that the net deferred tax assets would be realized, we would reverse the applicable portion of the previously provided valuation allowance. As of December 31, 2014, the valuation allowance against our U.S. deferred income tax assets was approximately $25.4 million.

We calculate our current and deferred tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the subsequent year. Adjustments based on filed returns are generally recorded in the period when the tax returns are filed.

The amount of income tax we pay is subject to audits by federal, state and foreign tax authorities, which may result in proposed assessments. Our estimate of the potential outcome for any uncertain tax issue is highly judgmental. We believe that we have adequately provided for any reasonably foreseeable outcome related to these matters. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved, audits are closed or when statutes of limitation on potential assessments expire. Additionally, the tax jurisdictions in which our earnings or deductions are realized may differ from our current estimates. As a result, our effective tax rate may fluctuate significantly on a quarterly basis.

We do not provide for a U.S. income tax liability on the undistributed earnings of our foreign subsidiaries. The earnings of our foreign subsidiaries, which reflect full provision for non-U.S. income taxes, are indefinitely reinvested in non-U.S. operations.

Stock-based compensation

We measure stock-based compensation at the grant date based on the fair value of stock options and employee stock purchase grants under the employee stock purchase plan (“ESPP”) using the Black-Scholes-Merton (“BSM”) option pricing model. The fair value is recognized as an expense on a straight-line basis over the requisite service period, which is generally the vesting period. The fair value of the stock options we grant to nonemployees is estimated based on the fair market value on each vesting date, and is remeasured at each reporting period until the services required under the arrangement are completed.

Determining the fair value of stock options and ESPP grants at the grant date requires the input of various assumptions, including the fair value of the underlying common stock, expected future share price volatility and expected term. The assumptions used in calculating the fair value of stock options and ESPP grants represent our best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. We estimate the forfeiture rate based on historical experience of our stock options that are granted, exercised and cancelled. If the actual forfeiture rate is materially different from our estimate, stock-based compensation expense in future periods could be significantly different from what was recorded in the current period.

The BSM model requires the use of highly subjective and complex assumptions which determine the fair value of stock options and ESPP grants. We estimate the fair value of each stock option and ESPP grant on the date of grant and estimate expected volatility based on the historical volatility of a guideline group of publicly traded companies. The expected term of stock options is based upon the simplified method for estimating expected term. The expected term of ESPP grants is based upon the length of each respective purchase period. The risk-free rate for the expected term of stock options and ESPP grants is based on the U.S. Treasury Constant Maturity rate.

 

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Stock-based compensation expense for restricted stock units (“RSUs”) is measured based on the closing fair market value of our common stock on the date of grant and expensed on a straight-line basis over the requisite service period.

Consistent with prior years, we use the “with and without” approach in determining the order in which our tax attributes in connection with excess stock option tax benefits are utilized. The “with and without” approach results in the recognition of the windfall stock option tax benefits only after all other tax attributes have been considered in the annual tax accrual computation. Also consistent with prior years, we only consider the direct effects of the windfall deduction on the computation of other tax attributes as an additional component of equity. This incremental tax benefit is credited to additional paid in capital when realized.

Construction in progress

During 2012 and 2013, construction in progress included the build-to-suit construction cost of our headquarters and costs incurred related to the implementation of our enterprise resources planning (“ERP”) system. Pursuant to a lease agreement, we agreed to pay construction costs in excess of a certain amount, and we had certain indemnification obligations related to the construction. Therefore, we had capitalized the cost of the construction as construction in progress with a corresponding obligation for construction in progress in the consolidated balance sheets. See Note 8, “Commitments and Contingencies,” to our consolidated financial statements included in this Annual Report for additional information. Upon lease commencement, we concluded that the build-to-suit facility lease qualified for sale-leaseback accounting and determined that it would be treated as a sale-leaseback arrangement and as an operating lease. As of December 31, 2013, both projects were completed and capitalized as property and equipment in our consolidated balance sheets.

JOBS Act

In April 2012, the JOBS Act was enacted. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We are electing to delay such adoption of new or revised accounting standards, and as a result, we may not comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for other companies.

Subject to certain conditions set forth in the JOBS Act, as an emerging growth company, we currently rely on certain of these exemptions. These exemptions include, without limitation, providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404 and complying with any requirement that may be adopted. We will remain an emerging growth company upon the earliest of (i) January 1, 2018, (ii) the first fiscal year after our annual gross revenues are $1.0 billion or more, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities or (iv) as of the end of any fiscal year in which the market value of our common stock that is held by nonaffiliates exceeds $700 million as of the end of the second quarter of that fiscal year.

 

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Results of operations

The following table sets forth our historical operating results for 2014, 2013 and 2012. The period to period comparison of our financial results is not necessarily indicative of the financial results we may achieve in future periods.

 

     Year Ended December 31,  
     2014     2013     2012  
     (in thousands, except percentages)  
     Amount     Percent
of Total
Revenue
    Amount     Percent
of Total
Revenue
    Amount     Percent
of Total
Revenue
 

Revenue:

            

Hardware

   $ 104,123        92   $ 150,010        94   $ 107,267        75 %

Licensing

     9,217        8     10,121        6     36,638        25 %
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

  113,340      100   160,131      100   143,905      100 %

Cost of revenue

  56,572      50   71,267      44   62,247      43 %
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

  56,768      50   88,864      56   81,658      57 %

Operating expenses:

Research and development

  50,613      45   43,256      27   31,520      22 %

Selling, general and administrative

  46,153      41   41,346      26   35,271      25 %

Impairment of goodwill and intangible assets

  31,336      27   —        —        —        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

  128,102      113   84,602      53   66,791      47 %
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

  (71,334   (63 )%    4,262      3   14,867      10 %

Interest income, net

  38      0   157      0   164      0 %

Other expense, net

  (347   0   (280   0   (586   0 %
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

  (71,643   (63 )%    4,139      3   14,445      10 %

Income tax provision (benefit)

  1,968      2   2,069      1   (1,152   (1 )%
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

$ (73,611   (65 )%  $ 2,070      2 $ 15,597      11 %
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comparison of 2014 and 2013

The following sets forth our operating results for 2014 and 2013. The period to period comparison of our financial results is not necessarily indicative of the financial results we may achieve in future periods.

Revenue

 

     Year Ended December 31,              
     2014     2013     Change  
     (in thousands, except percentages)  
     Amount      % of total
revenues
    Amount      % of total
revenues
    Amount     %  

Revenue:

              

Hardware

   $ 104,123         92   $ 150,010         94   $ (45,887 )     (31 )% 

Licensing

     9,217         8     10,121         6     (904 )     (9 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Total revenue

$ 113,340      100 $ 160,131      100 $ (46,791 )   (29 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Hardware revenue for 2014 was $104.1 million, compared to $150.0 million for 2013, a decrease of $45.9 million, or 31%. The decrease was due to two factors. First, one of our OEMs ended production of its 2010

 

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model mobile phone in September 2013, which resulted in a $23.1 million decrease in revenue. Second, we were impacted by the softness in demand for certain high-end smart phones, which resulted in another $22.8 million decrease in revenue.

Licensing revenue for 2014 was $9.2 million, compared to $10.1 million for 2013, a decrease of $0.9 million, or 9%. The decrease was primarily due to declining demand for one of our OEM’s 2011 model of its mobile phones. We expect this royalty-related revenue to decline significantly in 2015.

In 2014, revenue from Samsung and Comtech, which sells our products to end customers including Xiaomi, accounted for 75% and 11% of total revenue, respectively. In 2013, Samsung, Apple and Comtech accounted for 63%, 21% and 11% of total revenue, respectively. No other OEM, CM or distributor accounted for more than 10% of our total revenue in either period.

Revenue by geography

 

     Year Ended December 31,              
     2014     2013     Change  
     (in thousands, except percentages)  
     Amount      % of total
revenues
    Amount      % of total
revenues
    Amount     %  

Revenue:

              

South Korea

   $ 85,008         75   $ 102,305         64   $ (17,297     (17 )% 

China

     17,662         16     46,702         29   $ (29,040     (62 )% 

United States

     10,247         9     10,734         7   $ (487     (5 )% 

Other

     423         0     390         0   $ 33        8
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Total revenue

$ 113,340      100 $ 160,131      100 $ (46,791   (29 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Revenue generated from Asia represented 91% and 93% of our total revenue for 2014 and 2013, respectively. Revenue generated in South Korea decreased $17.3 million for 2014 compared to 2013 primarily due to a $17.2 million reduction in demand from Samsung related to weaker sales of its high-end smart phones in 2014 compared with sales of its high-end smart phones in 2013. Revenue generated in China decreased $29.0 million primarily due to a $23.1 million reduction in demand from one of our OEM’s ending production of their 2010 phone in September of 2013.

Revenue generated in the United States, which was primarily comprised of our licensing revenue, represented 9% and 7% of our total revenue for 2014 and 2013, respectively. Revenue generated in the United States decreased $0.5 million for 2014 compared to 2013 and was primarily due to the decrease in licensing revenue from one of our OEMs.

Cost of revenue and gross profit

 

     Year Ended December 31,              
     2014     2013     Change  
     (in thousands, except percentages)  
     Amount      % of total
revenues
    Amount      % of total
revenues
    Amount     %  

Cost of revenue

   $ 56,572         50 %   $ 71,267         45 %   $ (14,695     (21 )% 

Gross profit

     56,768         50 %     88,864         55 %   $ (32,096     (36 )% 

Cost of revenue for 2014 was $56.6 million, compared to $71.3 million for 2013, a decrease of $14.7 million, or 21%. A decrease of $6.6 million was due to one of our OEMs ending production of its 2010

 

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model mobile phone in September 2013, and the remaining decrease was primarily due to softness in demand for certain high-end smart phones. This was partially offset by an increase of approximately $1.6 million in amortization expense related to the developed technology intangible asset acquired in connection with our acquisition of Sensor Platforms.

Gross margin percentage was 50% and 55% for 2014 and 2013, respectively. The decrease was primarily due to one of our OEMs ending production of its 2010 model mobile phone in September of 2013, a reduction in average selling prices related to our older generation products, and amortization expense related to the developed technology intangible asset acquired in connection with our acquisition of Sensor Platforms.

Operating expenses

 

     Year Ended December 31,               
     2014     2013     Change  
     (in thousands, except percentages)  
     Amount      % of total
revenues
    Amount      % of total
revenues
    Amount      %  

Research and development

   $ 50,613         45 %   $ 43,256         27 %   $ 7,357         17

Selling, general and administrative

     46,153         41 %     41,346         26 %     4,807         12

Impairment of goodwill and intangible assets

     31,336         27 %     —           —          31,336         nm   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Total operating expenses

$ 128,102      113 % $ 84,602      53 % $ 43,500      51
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

nm—not meaningful

Research and development. Research and development expenses for 2014 were $50.6 million, compared to $43.3 million for 2013, an increase of $7.4 million, or 17%. The increase was primarily due to a $5.4 million increase in employee-related expenses (primarily including increases of $4.2 million in salaries, payroll taxes, employee benefits and stock-based compensation as a result of additional headcount and $0.7 million of restructuring charges due to the implementation of a restructuring plan for a workforce reduction through involuntary terminations), and an increase in facility and information technology expenses of $2.3 million as a result of our move to a new facility in Mountain View, California that occurred in October 2013. Additionally, licensing expense and consulting and outside services expenses increased $0.8 million in order to support the increase in research and development activities, and depreciation expense increased $0.2 million related to the increase in fixed assets. These were partially offset by a $1.5 million decrease in costs associated with certain engineering and design efforts due to the cancellation of certain projects.

Selling, general and administrative. Selling, general and administrative expenses for 2014 were $46.2 million, compared to $41.3 million for 2013, an increase of $4.8 million, or 12%. The increase was due to an increase in depreciation expenses of $2.0 million primarily due to our new facility build-out in Mountain View, California that was completed upon the commencement of our occupancy in October 2013, an increase in professional services fees of $1.2 million primarily related to the acquisition of Sensor Platforms, an increase of $0.7 million of restructuring charges due to the implementation of a restructuring plan for a workforce reduction through involuntary terminations, an increase in consulting fees of $0.6 million for management consulting services, and amortization expense of $0.5 million related to the customer relationship intangible asset acquired in connection with the acquisition of Sensor Platforms. These were partially offset by reductions in travel related expenses of $0.3 million.

Impairment of goodwill and intangible assets. As a result of a significant drop in the trading prices of our common stock in the public stock market during the three months ended December 31, 2014, we performed impairment analyses on both our goodwill and long-lived assets as of November 1, 2014. Based on the results of the impairment analyses, we recorded an impairment charge of $31.3 million, which was comprised of

 

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$20.7 million for goodwill, $10.5 million for the developed technology intangible asset and $0.1 million for the customer relationship intangible asset. See Note 6 to our consolidated financial statements included in this Annual Report for additional information.

Other expense, net

 

     Year Ended December 31,              
             2014                     2013             Change  
     (in thousands, except percentages)  
     Amount     Amount     Amount     %  

Other expense, net

   $ (347   $ (280 )   $ (67     24

Other expense, net, for each of 2014 and 2013 was $0.3 million. Other expense, net, was mainly related to foreign exchange losses for each of 2014 and 2013.

Income tax provision

 

     Year Ended December 31,               
             2014                      2013              Change  
     (in thousands, except percentages)  
     Amount      Amount      Amount     %  

Income tax provision

   $ 1,968       $ 2,069       $ (101     (5 )% 

Our income tax provision for 2014 was $2.0 million compared to $2.1 million for 2013. The decrease was primarily due to a decrease in current tax due to a pretax net loss in 2014, partially offset by an increase in the valuation allowance for U.S. deferred tax assets that was recorded during the three months ended September 30, 2014.

The effective tax rate for 2014 was (2.7)% compared to an effective tax rate of 50% for 2013. The decrease in the 2014 effective tax rate was primarily a result of our pretax loss in 2014 and the increase in the valuation allowance for U.S. deferred tax assets.

Comparison of 2013 and 2012

Revenue

 

     Year Ended December 31,              
     2013     2012     Change  
     (in thousands, except percentages)  
     Amount      % of total
revenues
    Amount      % of total
revenues
    Amount     %  

Revenue:

              

Hardware

   $ 150,010         94   $ 107,267         75   $ 42,743        40

Licensing

     10,121         6     36,638         25     (26,517     (72 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Total revenue

$ 160,131      100 $ 143,905      100 $ 16,226      11
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Hardware revenue for 2013 was $150.0 million, compared to $107.3 million for 2012, an increase of $42.7 million, or 40%. The increase was due primarily to increased sales to Samsung of $32.4 million and sales to Chinese OEMs of $13.7 million, partially offset by a decline in the purchase of our hardware processor by Apple and its CMs of $6.6 million.

Licensing revenue for 2013 was $10.1 million, compared to $36.6 million for 2012. We commenced recognizing licensing revenue in 2012 as one of our OEM’s transitioned to licensing of our processor IP for the

 

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2011 model of its mobile phones. During 2013, no new mobile devices licensing arrangements had occurred and the product family of mobile devices providing royalty payments was being phased-out by newer device models in which our processor IP was not enabled.

In 2013, Samsung, Apple and Comtech accounted for 63%, 21% and 11% of total revenue, respectively. In 2012, Samsung, Apple and Foxconn accounted for 48%, 27% and 14% of total revenue, respectively. No other OEM, CM or distributor accounted for more than 10% of our total revenue in either period. Aggregate sales to distributors accounted for less than 10% of our total revenue in 2012.

Revenue by Geography

 

     Year Ended December 31,              
     2013     2012     Change  
     (in thousands, except percentages)  
     Amount      % of total
revenues
    Amount      % of total
revenues
    Amount     %  

Revenue:

              

South Korea

   $ 102,305         64   $ 70,740         49   $ 31,565        45

China

     46,702         29     33,006         23     13,696        41

United States

     10,734         7     39,732         28     (28,998     (73)

Other

     390         0     427         0     (37     (9)
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Total revenue

$ 160,131      100 $ 143,905      100 $ 16,226      11
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Substantially all of our hardware revenue was generated from the sale of our products to CMs and OEMs with their primary manufacturing operations and distributors located in Asia. For 2013 and 2012, revenue generated in Asia represented 93% and 72% of our total revenue, respectively. Revenue generated in United States, which primarily comprised of our licensing revenue, represented 7% and 28% of our total revenue for 2013 and 2012, respectively.

Cost of revenue and gross profit

 

     Year Ended December 31,               
     2013     2012     Change  
     (in thousands, except percentages)  
     Amount      % of total
revenues
    Amount      % of total
revenues
    Amount      %  

Cost of revenue

   $ 71,267         45   $ 62,247         43   $ 9,020         14

Gross profit

   $ 88,864         55     81,658         57   $ 7,206         9

Cost of revenue for 2013 was $71.3 million, compared to $62.2 million for 2012, an increase of $9.0 million, or 14%. The increase was primarily due to the increased sales volume of our processors in 2013 and was partially offset by a reduction of $2.4 million write-down of excess and obsolete inventory of certain of our processors that exceeded the amount of inventory we determined was needed to retain to satisfy our then-current forecast of the future demand for our processors in 2012. Gross margin was 55% and 57% in 2013 and 2012, respectively. The decrease in gross margin percentage was due to lower royalty revenue from the licensing of our processor IP, and was partially offset by the mix of newer, higher margin products introduced in 2013.

 

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Operating expenses

 

     Year Ended December 31,               
     2013     2012     Change  
     (in thousands, except percentages)         
     Amount      % of total
revenues
    Amount      % of total
revenues
              

Research and development

   $ 43,256         27   $ 31,520         22   $ 11,736         37

Selling, general and administrative

     41,346         26     35,271         25     6,075         17
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Total operating expenses

$ 84,602      53 $ 66,791      47 $ 17,811      27
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Research and development

Research and development expenses for 2013 were $43.3 million, compared to $31.5 million for 2012, an increase of $11.7 million, or 37%. The increase was primarily due to additional headcount, resulting in a $6.9 million increase in salaries, employee-related benefits and stock-based compensation expense. During 2013, we moved into new lease facilities to accommodate headcount growth resulting in a $2.1 million increase for domestic and international facilities and related costs. Depreciation of assets and amortization of software and licenses increased by $1.1 million in order to support the increase in research and development activities. The increase was also due to a decrease in research and development reimbursements of $1.3 million compared to 2012 for the performance of nonrecurring engineering work. Increases were partially offset by $0.7 million in lower costs for consulting and outside services, including offshore providers of product development services.

Selling, general and administrative

Selling, general and administrative expenses for 2013 were $41.3 million, compared to $35.3 million for 2012, an increase of $6.1 million, or 17%. The increase was primarily due to additional headcount, resulting in a $3.7 million increase in salaries, employee-related benefits and stock-based compensation expense. During 2013, we moved into new lease facilities to accommodate headcount growth resulting in a $1.4 million increase for domestic and international facilities and related costs. In addition, depreciation of assets and amortization of software and licenses increased by $1.1 million, which was related to the implementation and integration of a new ERP system.

Other expense, net

 

     Year Ended December 31,               
     2013     2012     Change  
     (in thousands, except percentages)  
     Amount     Amount     Amount      %  

Other expense, net

   $ (280   $ (586   $ 306         (52 )% 

Other expense, net for 2013 was $0.3 million, compared to $0.6 million for 2012, a decrease of $0.3 million, or 52%. The decrease in 2013 was primarily related to the elimination of the mark-to-market adjustments in the fair value of our convertible preferred stock warrants that occurred during 2012. Almost all of these convertible preferred stock warrants were converted to common stock upon our IPO.

Income tax provision (benefit)

Income tax provision for 2013 was $2.1 million compared to an income tax benefit of $1.2 million for 2012, a change of $3.3 million. The increase in income tax provision in 2013 was primarily related to income taxes in the United States as a result of the limitation on the use of research and development (“R&D”) credits to offset U.S. taxable income, and in addition the partial valuation allowance release in 2013 was offset by deferred tax expense. The income tax benefit in 2012 was primarily due to tax benefit from the partial valuation allowance release on U.S. federal deferred tax assets.

 

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The effective tax rate for 2013 was 50.0% compared to an effective tax rate of (8.0)% for 2012. The increase in the 2013 effective tax rate was a result of our lower pre-tax income, the increase in the valuation allowance and higher unrecognized tax benefits partially offset by the reinstatement of the federal R&D credits in 2013.

Quarterly Results of Operations

The following tables set forth our unaudited quarterly consolidated statements of operations data for each of the eight quarters ended December 31, 2014. In management’s opinion, the data below have been prepared on the same basis as the audited consolidated financial statements included elsewhere in this Annual Report, and reflect all necessary adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of this data. The results of historical periods are not necessarily indicative of the results expected for a full year or any future period. The following two tables present our unaudited quarterly consolidated statements of operations data first in dollars and then as a percentage of total revenues for the periods presented.

 

    Quarters Ended  
    December 31,
2014
    September 30,
2014
    June 30,
2014
    March 31,
2014
    December 31,
2013
    September 30,
2013
    June 30,
2013
    March 31,
2013
 
    (in thousands, except per share data)  

Revenue:

               

Hardware

  $ 15,037      $ 20,015     $ 34,995      $ 34,076     $ 31,109      $ 32,445     $ 42,788      $ 43,668   

Licensing

    2,171        2,636       2,526        1,884       2,032        2,007       2,521        3,561   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    17,208        22,651       37,521        35,960       33,141        34,452       45,309        47,229   

Cost of revenue

    10,129        12,063       17,016        17,364       15,806        15,179       18,562        21,720   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    7,079        10,588       20,505        18,596       17,335        19,273       26,747        25,509   

Operating expenses:

               

Research and development

    11,468        13,594       13,363        12,188       11,958        11,499       10,349        9,450   

Selling, general and administrative

    9,581        11,996       12,331        12,245       10,279        9,929       10,793        10,345   

Impairment of goodwill and intangible assets

    31,336        —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    52,385        25,590       25,694        24,433       22,237        21,428       21,142        19,795   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (45,306     (15,002 )     (5,189     (5,837 )     (4,902     (2,155 )     5,605        5,714   

Interest income, net

    5        5       10        18       29        37       37        54   

Other expense, net

    (201     (80 )     (33     (33 )     (71     (50 )     (84     (75
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    (45,502     (15,077 )     (5,212     (5,852 )     (4,944     (2,168 )     5,558        5,693   

Income tax provision (benefit)

    15        1,231       (763     1,485       (2,023     153       2,891        1,048   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (45,517   $ (16,308 )   $ (4,449   $ (7,337 )   $ (2,921   $ (2,321 )   $ 2,667      $ 4,645   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share:

               

Basic

  $ (1.96   $ (0.71 )   $ (0.20   $ (0.33 )   $ (0.13   $ (0.11 )   $ 0.13      $ 0.22   

Diluted

  $ (1.96   $ (0.71 )   $ (0.20   $ (0.33 )   $ (0.13   $ (0.11 )   $ 0.11      $ 0.20   

Weighted average shares used in computing net income (loss) per share:

               

Basic

    23,173        22,810       22,518        22,221       22,012        21,636       21,240        20,961   

Diluted

    23,173        22,810       22,518        22,221       22,012        21,636       23,230        23,324   

 

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  Quarters Ended  
  December 31,
2014
  September 30,
2014
  June 30,
2014
  March 31,
2014
  December 31,
2013
  September 30,
2013
  June 30,
2013
  March 31,
2013
 
  (as a percent of total revenue for period presented)  

Revenue:

Hardware

  87   88 %   93   95 %   94   94 %   94   92

Licensing

  13   12 %   7   5 %   6   6 %   6   8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

  100   100 %   100   100 %   100   100 %   100   100

Cost of revenue

  59   53 %   45   48 %   48   44 %   41   46
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

  41   47 %   55   52 %   52   56 %   59   54

Operating expenses:

Research and development

  66   60 %   35   34 %   36   33 %   23   20

Selling, general and administrative

  56   53 %   33   34 %   31   29 %   24   22

Impairment of goodwill and intangible assets

  182   0 %   0   0 %   0   0 %   0   0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

  304   113   68   68 %   67   62 %   47   42
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

  (263 %)    (66 %)    (13 %)    (16 %)    (15 %)    (6 %)    12   12

Interest income, net

  0   0 %   0   0 %   0   0 %   0   0

Other expense, net

  (1 %)    (1 %)   0   0 %   0   0 %   0   0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

  (264 %)    (67 %)    (13 %)    (16 %)    (15 %)    (6 %)   12   12

Income tax provision (benefit)

  0   5 %   (2 %)    4 %   (6 %)    1 %   6   2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  (264 %)    (72 %)   (11 %)    (20 %)   (9 %)    (7 %)   6   10
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Quarterly Trends

In the three months ended September 30, 2013, total revenue decreased by $10.9 million from the prior quarter primarily due to lower sales to Samsung.

Total revenue in the three month periods ended September 30, 2014 and December 31, 2014 decreased compared to prior quarters in 2014 and 2013. For the three-month periods ended September 30, 2014 and December 31, 2014, total revenue decreased by $14.9 million and $5.4 million, respectively, from the respective prior quarter primarily due to lower sales to Samsung.

Operating expenses and loss before income taxes for the three months ended December 31, 2014 increased by $26.8 million and $30.4 million, respectively, from the prior quarter primarily due to an impairment charge of $31.3 million related to goodwill and intangible assets as discussed in Note 6 to the consolidated financial statements included in this Annual Report.

Liquidity and capital resources

Since our inception, we have incurred significant losses, and, as of December 31, 2014, we had an accumulated deficit of $98.1 million. Our principal sources of liquidity have typically been cash flows from operations and proceeds from the exercise of stock options and our employee stock purchase plan.

As of December 31, 2014, we had cash and cash equivalents of $46.2 million, short-term investments of $9.0 million, restricted cash of $4.2 million, future minimum lease payment obligations of $39.4 million and no other debt. During 2014, we had access to a $10.0 million revolving line of credit facility with available funds based on eligible accounts receivable and customer purchase orders. The revolving line of credit agreement expired on December 31, 2014 and was not renewed.

We believe that our existing sources of liquidity will satisfy our working capital and capital requirements for at least the next 12 months. We have had net cash outflows from operating activities during each quarter and the year of 2014. We cannot assure you that we will be successful in executing our business plan, maintaining and growing our existing customer base or achieving profitability. Failure to generate sufficient revenue or control costs may require us to raise additional capital through equity or debt financing. Such additional financing may not be available on terms acceptable to us, or at all, and could require us to modify, delay or abandon some of our planned future expansion or expenditures or reduce some of our ongoing operating costs. If we are unable to

 

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obtain additional financing, it could have a material adverse effect on our business, financial condition, operating results and cash flows and our ability to achieve our intended business objectives. If we raise additional funds through further issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership of our company and any new securities we issue could have rights, preferences and privileges senior to those of holders of our common stock.

Our cash flows for 2014, 2013 and 2012 were as follows:

 

     Year Ended December 31,  
     2014     2013     2012  
     (in thousands)  

Net cash provided by (used in) operating activities

   $ (43,298   $ 15,299     $ 26,943   

Net cash used in investing activities

     (39,090     (5,976 )     (24,016

Net cash provided by financing activities

     3,881        5,762       90,665   

Cash flows from operating activities

Our operating cash flows primarily consist of and depend on the timing and amount of cash receipts from sales of our products and royalty payments, inventory purchases and our payment of operating expenses. Net cash provided by (used in) operating activities for the periods presented consisted of net income or losses adjusted for certain noncash items and changes in working capital. Within changes in working capital, changes in accounts receivable, inventory and accounts payable generally account for the largest adjustments, as we typically expect to use more cash to fund accounts receivable and build inventory as our business grows. Additionally, increases in accounts payable will typically provide more cash as we do more business with our contract foundries and other third parties, depending on the timing of payments.

For 2014, net cash used in operating activities was $43.3 million, compared to net cash provided by operating activities of $15.3 million in 2013. The net cash used in 2014 was primarily the result of a net loss of $73.6 million, an increase in inventories of $16.3 million due to softness in demand for certain high-end smart phones and a decrease of $4.5 million in accounts payable due to lower inventory purchases. These were partially offset by non-cash expense items including impairment of goodwill and intangible assets of $31.3 million, depreciation and amortization expense of $7.9 million, stock-based compensation expense of $7.8 million and inventory write-downs of $1.8 million, and a decrease in accounts receivable of $2.9 million due to the reduction in billings resulting from the softness in demand for certain high-end smart phones.

For 2013, net cash provided by operating activities was $15.3 million, as compared to $26.9 million for 2012. The most significant component of the 2013 decrease in cash provided by operating activities was lower net income, partially offset by lower accounts receivable due to earlier than expected payments from one customer.

Cash flows from investing activities

Our investing activities consist primarily of purchases and sales of short-term investments and purchases of property and equipment.

For 2014, net cash used in investing activities was $39.1 million, compared to $6.0 million in 2013. Net cash used in investing activities for 2014 consisted primarily of the acquisition of Sensor Platforms for $35.4 million (net of cash acquired), the purchase of marketable securities of $27.0 million, the acquisition of property and equipment of $5.5 million to support our ongoing business efforts, and a payment of $4.2 million to an escrow agent in connection with our acquisition of Sensor Platforms. These were partially offset by the proceeds from the sale and maturities of marketable securities of $32.9 million.

 

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For 2013, net cash used in investing activities was $6.0 million, compared to $24.0 million for 2012. The decrease in 2013 was primarily due to the net purchase of marketable securities following our IPO in 2012 and by the net sale of marketable securities during 2013, which was partially offset by purchased property and equipment of $9.1 million to support the growth in our business.

Cash flows from financing activities

For 2014, net cash provided by financing activities was $3.9 million, compared to $5.8 million for 2013. Net cash provided by financing activities during 2014 was primarily due to proceeds of $4.4 million from the exercise of employee stock options and employee stock purchase plans, partially offset by tax payments related to RSUs of $0.5 million.

For 2013, net cash provided by financing activities was $5.8 million, compared to net cash provided of $90.7 million for 2012. During 2013, we received proceeds of $5.0 million from the exercise of stock options and employee stock purchase plan. Up to 2012, we had financed our operations primarily with proceeds from the sale of our convertible preferred stock and borrowings under our credit facilities. In 2012, we received net inflows of cash from financing activities related to our IPO, which we do not expect to recur.

Off balance sheet arrangements

During the periods presented, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off balance sheet arrangements or other contractually narrow or limited purpose.

Restructuring

In the three months ended September 30, 2014, we encountered a significant downturn in demand from one of our major customers due to the continuing softness with certain high-end smart phones, which caused a disproportionate impact on our operating results and financial outlook in the short-term. In an effort to align overall spending with revenue, we announced and implemented a restructuring plan for a workforce reduction through involuntary terminations.

The total restructuring charges for 2014 were approximately $1.4 million, out of which $1.3 million was paid as of December 31, 2014. The remaining balance of $0.1 million is expected to be paid during the three months ended March 31, 2015. The cost savings resulting from the restructuring are generally expected to be offset by increases in other expenses.

Recent accounting pronouncements

In January 2015, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update (“ASU”) which simplifies income statement classification by removing the concept of extraordinary items from GAAP. As a result, items that are both unusual and infrequent will no longer be separately reported net of tax after continuing operations. The new standard is effective for the fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. We do not expect to early adopt this guidance and we do not believe that the adoption of this guidance will have a material impact on our consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 will explicitly require management to assess an

 

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entity’s ability to continue as a going concern, and to provide related footnote disclosure in certain circumstances. The new standard will be effective for all entities in the first annual period ending after December 15, 2016. Early adoption is permitted. We do not expect to early adopt this guidance and we do not believe that the adoption of this guidance will have a material impact on our consolidated financial statements.

In May 2014, the FASB and the International Accounting Standards Board (“IASB”) issued a converged standard on revenue recognition from contracts with customers. The objective of the new guidance is to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability within industries, across industries, and across capital markets. The newly converged standard contains principles that will be applied to determine how revenue should be measured and the timing of when it should be recognized. The guidance is effective for fiscal years, and interim periods within fiscal years, beginning after December 15, 2016. Early adoption is not permitted. We are currently evaluating the impact that this guidance may have on our financial position, results of operations and cash flows.

In July 2013, the FASB issued final guidance on the presentation of certain unrecognized tax benefits in the financial statements. Under the new guidance, a liability related to an unrecognized tax benefit would be offset against a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In that case, the liability associated with the unrecognized tax benefit is presented in the financial statements as a reduction to the related deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2014 because we are an emerging growth company under the Jobs Act and have elected to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. Early adoption is permitted. We did not elect for an early adoption of this new guidance. Upon adoption of the guidance in 2015, we plan to offset $0.3 million of the unrecognized tax benefits in noncurrent income taxes payable with the related deferred tax asset.

Contractual obligations and commitments

The following table summarizes our lease obligations and contractual obligations as of December 31, 2014:

 

     Payments Due by Fiscal Period  
     Total      Less than
1 year
     1 to 3
years
     3 to 5
years
     More than
5 years
 
     (in thousands)  

Lease obligations (1)

   $ 39,363       $ 4,844       $ 8,779       $ 8,466       $ 17,274   

Contractual obligations (2) (3)

     26,565         26,565         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
$ 65,928    $ 31,409    $ 8,779    $ 8,466    $ 17,274   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Our operating lease commitments as of December 31, 2014 primarily relate to the lease of our corporate headquarters in Mountain View, California and, to a lesser extent, our offices in Scotts Valley, California, Lafayette, Colorado, South Korea, Taiwan, China, Singapore and India. On June 5, 2012, we entered into a lease agreement for our corporate headquarters, which consists of 87,565 square feet in Mountain View, California. Our lease for this facility commenced during the fourth quarter of 2013 with a term of ten years and an option to extend for an additional five years. As of December 31, 2013, we had completed the build-out for our corporate headquarters and had taken occupancy of that facility.
(2) As of December 31, 2014, we had purchase obligations of $26.6 million with our third-party foundries and other suppliers. Purchase obligations represent primarily outstanding purchase orders that we have placed with our suppliers. We may generally cancel these purchase commitments at any time; however, we are required to pay all costs incurred through the cancellation date. The lead time for delivery is long, typically 12 to 14 weeks, and suppliers must prepare unique materials for us at the beginning of the fabrication process. Accordingly, we rarely cancel our orders once placed and the production process has begun.
(3) As of December 31, 2014, we had $1.1 million of noncurrent gross unrecognized tax benefits under generally accepted accounting guidance. The timing of any payments that could result from these unrecognized tax benefits will depend upon a number of factors. We are not able to provide a reasonable estimate of the timing of future payments relating to these potential obligations and, accordingly, these unrecognized tax benefits are excluded from this table. The possible reduction in these liabilities for uncertain tax positions in multiple tax jurisdictions that may impact the statement of operations in the next 12 months is not considered significant.

 

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Item 7A. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risks in the ordinary course of our business. These risks primarily include foreign exchange rate and interest rate sensitivities as follows:

Foreign currency risk

We sell our products to CMs and OEMs with their primary manufacturing operations and distributors in Asia. All sales of our processors and the license of our processor IP are denominated in U.S. dollars. We incur a small portion of our expenses in currencies other than the U.S. dollar. The expenses we incur in currencies other than U.S. dollars affect gross profit, research and development, selling, general and administrative expenses and income taxes.

As of December 31, 2014, the functional currency of our non-U.S. entities was the U.S. dollar. Transaction gains and losses resulting from transactions denominated in currencies other than the respective functional currencies are included in “Other expense, net” in the consolidated statements of operations for the periods presented. The amounts of transaction gains and losses were not material in any of the periods presented.

Given that the operating expenses that we incur in currencies other than U.S. dollars have not been a significant percentage of our revenue, we do not believe that our foreign currency exchange rate fluctuation risk is significant. Consequently, we do not believe that a hypothetical 10% change in foreign currency exchange rates would have a significant effect on our financial condition, operating results or cash flows.

We have not hedged exposures denominated in foreign currencies or used any other derivative financial instruments. Although we transact the overwhelming majority of our business in U.S. dollars, future fluctuations in the value of the U.S. dollar may affect the competitiveness of our products and thus may impact our financial condition, operating results and cash flows.

Interest rate sensitivity

Our exposure to market risk for changes in interest rates relates primarily to our cash, cash equivalents and short-term investments totaling $55.2 million as of December 31, 2014 and consisted primarily of cash, money market funds and U.S. government bonds and notes with maturities of less than one year from the date of purchase. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of the interest rates in the United States. However, because of the short-term nature of our interest bearing securities, a 10% change in market interest rates would not be expected to have a material impact on our financial condition, results of operations or cash flows.

 

Item 8. Financial Statements and Supplementary Data

The financial statements required by Item 8 are submitted as a separate section of this Annual Report commencing on page F-1. See Item 15, “Exhibits and Financial Statement Schedules.”

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

 

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2014. The term

 

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“disclosure controls and procedures,” as defined in Rules 13a- 15(e) and 15d- 15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2014, our Chief Executive Officer and Chief Financial Officer concluded that as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Management’s Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management has evaluated the effectiveness of our internal control over financial reporting as of December 31, 2014 using the criteria set forth in the 1992 version of the Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our evaluation, management has concluded that we maintained effective internal control over financial reporting as of December 31, 2014 based on the COSO criteria.

This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm on our internal control over financial reporting due to an exemption established by the JOBS Act for “emerging growth companies.”

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the three months ended December 31, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

Control systems, no matter how well conceived and operated, are designed to provide a reasonable, but not an absolute, level of assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. As a result of the inherent limitations in any control system, misstatements due to error or fraud may occur and not be detected.

 

Item 9B. Other Information

None.

 

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PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

Information required by this Item is incorporated by reference to the Proxy Statement to be filed with the SEC in connection with our 2015 annual meeting of stockholders (the “Proxy Statement”).

 

Item 11. Executive Compensation

Information required by this Item is incorporated by reference to the Proxy Statement.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information required by this Item is incorporated by reference to the Proxy Statement.

 

Item 13. Certain Relationships and Related Transactions and Director Independence

Information required by this Item is incorporated by reference to the Proxy Statement.

 

Item 14. Principal Accounting Fees and Services

Information required by this Item is incorporated by reference to the Proxy Statement.

 

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PART IV

 

Item 15. Exhibits and Financial Statements Schedules

1. Financial Statements

We have filed the consolidated financial statements listed in the Index to Consolidated Financial Statements on page F-1 as part of this Annual Report.

2. Financial Statement Schedules

Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes herein.

3. Exhibits

The following exhibits are filed herewith or incorporated by reference to exhibits previously filed with the SEC.

 

Exhibit
number

  

Description

  

Incorporated
by reference
from form

    

Incorporated
by reference
from exhibit
number

    

Date filed

 
  3.1    Amended and Restated Certificate of Incorporation of the Registrant.      S-1         3.1         1/13/2012   
  3.2    Amended and Restated Bylaws of the Registrant.      8-K         3.1         11/20/2013   
  4.1    Form of Common Stock Certificate of the Registrant.      S-1         4.1         5/8/2012   
  4.3    Amended and Restated Investors’ Rights Agreement dated February 3, 2010, by and among the Registrant and certain stockholders of the Registrant.      S-1         4.3         1/13/2012   
  4.3.1    Amendment to the Amended and Restated Investors’ Rights Agreement dated June 24, 2011, by and among the Registrant and certain stockholders of the Registrant.      S-1         4.3.1         1/13/2012   
  4.3.2    Amendment Number Two to the Amended and Restated Investors’ Rights Agreement dated April 17, 2012, by and among the Registrant and certain stockholders of the Registrant.      S-1         4.3.2         4/27/2012   
10.1    Form of Indemnification Agreement for directors and executive officers.      S-1         10.1         1/13/2012   
10.2#    2001 Stock Plan, as amended, and form of agreements used thereunder.      S-8         10.2         5/10/2012   
10.3#    2011 Equity Incentive Plan, as amended, and form of agreements used thereunder.      S-8         10.3         5/10/2012   
10.4#    Amended and Restated 2011 Equity Incentive Plan and form of agreements used thereunder.      10-K         10.4         3/14/2014   
10.5#    2011 Employee Stock Purchase Plan and form of agreements used thereunder.      10-Q         10.5         11/14/2013   

 

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Exhibit
number

  

Description

  

Incorporated
by reference
from form

    

Incorporated
by reference
from exhibit
number

    

Date filed

 
10.10#    Change of Control Severance Agreement by and between the Registrant and Peter B. Santos dated December 31, 2011.      S-1         10.10         1/13/2012   
10.11#    Change of Control Severance Agreement by and between the Registrant and Kevin S. Palatnik dated January 9, 2012.      S-1         10.11         1/13/2012   
10.12#    Form of Change of Control Severance Agreement by and between the Registrant and each of Edgar Auslander, Craig H. Factor, Stephanie Kaplan, Eitan Medina and Robert H. Schoenfield.      S-1         10.12         1/13/2012   
  10.14#    2012 Executive Incentive Compensation Plan.      S-1         10.14         4/20/2012   
  10.16    Office Lease, dated as of June 5, 2012 and executed on June 5, 2012, by and between the Registrant and CarrAmerica National Avenue, L.L.C.      8-K         10.16         6/11/2012   
  10.17#    Offer letter to Eitan Medina, dated June 1, 2012.      10-Q         10.17         8/7/2012   
  10.18#    Offer letter to Craig Factor, dated September 5, 2012.      10-Q         10.18         11/6/2012   
  10.20#    Offer letter to Stephanie Kaplan, dated August 15, 2014      10-Q         10.20         11/17/2014   
  10.21#    Offer letter to Edgar Auslander, dated May 1, 2014         
  10.22#    Sensor Platforms 2004 Stock Plan.      S-8         99.1         7/30/2014   
  10.23+    International Distributor Agreement by and between the Registrant and Comtech International (Hong Kong) Limited dated March 31, 2014         
  21.1    Subsidiaries.         
  23.1    Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm.         
  24    Power of Attorney (see the signature page to this Annual Report on Form 10-K).         
  31.1    Certification of Principal Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.         
  31.2    Certification of Principal Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.         
  32.1~    Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. §1350.         
101.INS    XBRL Instance Document         
101.SCH    XBRL Taxonomy Schema Linkbase Document         

 

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Exhibit
number

  

Description

  

Incorporated
by reference
from form

  

Incorporated
by reference
from exhibit
number

  

Date filed

101.CAL    XBRL Taxonomy Calculation Linkbase Document         
101.DEF    XBRL Taxonomy Definition Linkbase Document         
101.LAB    XBRL Taxonomy Labels Linkbase Document         
101.PRE    XBRL Taxonomy Presentation Linkbase Document         

 

# Management contracts or compensation plans or arrangements in which directors or executive officers are eligible to participate.
+ Portions of the exhibit have been omitted pursuant to request for confidential treatment filed with the Securities and Exchange Commission.
~ The certifications furnished in Exhibit 32.1 hereto are deemed to accompany this Form 10-K and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filings under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates them by reference.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

AUDIENCE INC.
By:   /s/    PETER B. SANTOS
  Peter B. Santos
  President and Chief Executive Officer

Date: March 9, 2015

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints each of Peter B. Santos and Kevin S. Palatnik as his true and lawful agent, proxy and attorney-in-fact, with full power of substitution and substitution, for him and in his name, place and stead, in any and all capacities, to (i) act on, sign, and file with the Securities and Exchange Commission any and all amendments to this Annual Report on Form 10-K, together with all schedules and exhibits thereto, (ii) act on, sign, and file such certificates, instruments, agreements and other documents as may be necessary or appropriate in connection therewith, and (iii) take any and all actions that may be necessary or appropriate to be done, as fully for all intents and purposes as he might or could do in person, hereby approving, ratifying and confirming all that such agent, proxy and attorney-in-fact or any of his substitutes may lawfully do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature

 

Title

 

Date

/S/    PETER B. SANTOS

Peter B. Santos

 

President, Chief Executive Officer and Director

(Principal Executive Officer)

  March 9, 2015

/S/    KEVIN S. PALATNIK

Kevin S. Palatnik

 

Chief Financial Officer

(Principal Financial and Accounting Officer)

  March 9, 2015

/S/    MARVIN D. BURKETT

Marvin D. Burkett

 

Director

  March 9, 2015

/S/    BARRY L. COX

Barry L. Cox

 

Director

  March 9, 2015

/S/    RICH GERUSON

Rich Geruson

 

Director

  March 9, 2015

/S/    MOHAN S. GYANI

Mohan S. Gyani

 

Chairman and Director

  March 9, 2015

/S/    GEORGE A. PAVLOV

George A. Pavlov

 

Director

  March 9, 2015

/S/    PATRICK SCAGLIA

Patrick Scaglia

 

Director

  March 9, 2015

 

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Table of Contents
Index to Financial Statements

Index to Consolidated Financial Statements

 

     Page  

Index to consolidated financial statements

     F-1   

Report of independent registered public accounting firm

     F-2   

Consolidated balance sheets

     F-3   

Consolidated statements of operations

     F-4   

Consolidated statements of comprehensive income

     F-5   

Consolidated statements of convertible preferred stock and stockholders’ equity (deficit)

     F-6   

Consolidated statements of cash flows

     F-7   

Notes to consolidated financial statements

     F-8   

The supplementary financial information required by this Item 8 is included in Item 7 under the caption “Quarterly Results of Operations.”

 

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Index to Financial Statements

Report of independent registered public accounting firm

To the Board of Directors and Stockholders of Audience, Inc.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of comprehensive income, of convertible preferred stock and stockholders’ equity (deficit) and of cash flows present fairly, in all material respects, the financial position of Audience, Inc. and its subsidiaries (the “Company”) at December 31, 2014 and December 31, 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

San Jose, California

March 9, 2015

 

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Index to Financial Statements

AUDIENCE, INC

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

     December 31,  
     2014     2013  
Assets     

Current assets:

    

Cash and cash equivalents

   $ 46,184      $ 124,691   

Short-term investments

     8,999        14,855   

Restricted cash

     4,200        170   

Accounts receivable, net of allowance for doubtful accounts of $46 and $0 as of December 31, 2014 and 2013, respectively

     2,789        5,670   

Inventories

     27,999        13,422   

Other current assets

     3,880        4,676   
  

 

 

   

 

 

 

Total current assets

  94,051      163,484   

Property and equipment, net

  11,634      13,533   

Intangible assets, net

  6,317      —     

Other noncurrent assets

  2,840      2,402   
  

 

 

   

 

 

 

Total assets

$ 114,842    $ 179,419   
  

 

 

   

 

 

 
Liabilities and stockholders’ equity

Current liabilities:

Accounts payable

$ 1,582    $ 6,304   

Accrued and other liabilities

  12,064      10,673   

Deferred credits and income

  725      265   
  

 

 

   

 

 

 

Total current liabilities

  14,371      17,242   

Income taxes payable—noncurrent

  1,114      935   

Deferred rent—noncurrent

  2,046      1,670   

Other liabilities- noncurrent

  28      191   
  

 

 

   

 

 

 

Total liabilities

  17,559      20,038   
  

 

 

   

 

 

 

Commitments and contingencies (Note 8)

Stockholders’ equity:

Common stock:

$0.001 par value—500,000,000 shares authorized as of December 31, 2014 and 2013; 23,289,034 shares and 22,111,375 shares issued and outstanding as of December 31, 2014 and 2013, respectively

  23      22   

Additional paid-in capital

  195,351      183,840   

Accumulated other comprehensive income

  —        (1

Accumulated deficit

  (98,091   (24,480
  

 

 

   

 

 

 

Total stockholders’ equity

  97,283      159,381   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

$ 114,842    $ 179,419   
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements

 

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Index to Financial Statements

AUDIENCE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

 

     Year Ended December 31,  
     2014     2013     2012  

Revenue:

      

Hardware

   $ 104,123      $ 150,010      $ 107,267   

Licensing

     9,217        10,121        36,638   
  

 

 

   

 

 

   

 

 

 

Total revenue

  113,340      160,131      143,905   

Cost of revenue

  56,572      71,267      62,247   
  

 

 

   

 

 

   

 

 

 

Gross profit

  56,768      88,864      81,658   

Operating expenses:

Research and development

  50,613      43,256      31,520   

Selling, general and administrative

  46,153      41,346      35,271   

Impairment of goodwill and intangible assets

  31,336      —        —     
  

 

 

   

 

 

   

 

 

 

Total operating expenses

  128,102      84,602      66,791   
  

 

 

   

 

 

   

 

 

 

Income (loss) from operations

  (71,334   4,262      14,867   

Interest income, net

  38      157      164   

Other expense, net

  (347   (280   (586
  

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

  (71,643   4,139      14,445   

Income tax provision (benefit)

  1,968      2,069      (1,152
  

 

 

   

 

 

   

 

 

 

Net income (loss)

$ (73,611 $ 2,070    $ 15,597   
  

 

 

   

 

 

   

 

 

 

Net income (loss) per share:

Basic

$ (3.25 $ 0.10    $ 0.73   
  

 

 

   

 

 

   

 

 

 

Diluted

$ (3.25 $ 0.09    $ 0.65   
  

 

 

   

 

 

   

 

 

 

Weighted average shares used in computing net income (loss) per share:

Basic

  22,683      21,467      13,377   
  

 

 

   

 

 

   

 

 

 

Diluted

  22,683      23,197      15,687   
  

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements

 

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Index to Financial Statements

AUDIENCE, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

 

     Year Ended December 31,  
     2014     2013     2012  

Net income (loss)

   $ (73,611   $ 2,070      $ 15,597   

Other comprehensive income (loss):

      

Foreign currency translation adjustments

     —          —          31   

Unrealized gain (loss) on available-for-sale securities, net of tax

     1        (4     3   
  

 

 

   

 

 

   

 

 

 

Net comprehensive income (loss)

$ (73,610 $ 2,066    $ 15,631   
  

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements

 

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Index to Financial Statements

AUDIENCE, INC.

CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

(in thousands, except share data)

 

    Convertible Preferred
Stock
    Common Stock     Additional
Paid-in
Capital
    Accumulated
Other
Comprehensive
Income (Loss)
    Accumulated
Deficit
    Total
Stockholders’
Equity
(Deficit)
 
    Shares     Amount     Shares     Amount          

Balances at December 31, 2011

    13,205,180      $ 74,348        1,023,736      $ 1      $ 3,732      $ (31   $ (42,147   $ (38,445

Issuance of common stock upon exercise of stock options

    —          —          502,203        1        1,226        —          —          1,227   

Issuance of common stock in connection with employee stock purchase plan

    —          —          183,259        —          1,233        —          —          1,233   

Issuance of common stock upon initial public offering, net of offering costs

    —          —          5,838,198        6        86,974        —          —          86,980   

Stock-based compensation

    —          —          —          —          3,134        —          —          3,134   

Foreign currency translation adjustments

    —          —          —          —          —          31        —          31   

Unrealized gain on short-term investments, net

    —          —          —          —          —          3        —          3   

Conversion of preferred stock to common stock

    (13,205,180     (74,348     13,205,180        13        74,335        —          —          74,348   

Warrants exercised

    —          —          110,269        —          1,804        —          —          1,804   

Conversion of preferred stock warrant to common stock warrant

    —          —          —          —          23        —          —          23   

Net income

    —          —          —          —          —          —          15,597        15,597   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31, 2012

  —        —        20,862,845      21      172,461      3      (26,550   145,935   

Issuance of common stock upon exercise of stock options

  —        —        905,186      1      2,610      —        —        2,611   

Issuance of restricted stock units

  —        —        21,371      —        (107   (107

Common stock warrants exercised

  —        —        976      —        —        —        —        —     

Issuance of common stock in connection with employee stock purchase plan

  —        —        320,997      —        2,401      —        —        2,401   

Stock-based compensation

  —        —        —        —        5,660      —        —        5,660   

Unrealized gain on short-term investments, net

  —        —        —        —        —        (4   —        (4

Tax windfall on stock-based compensation

  —        —        —        —        815      —        —        815   

Net income

  —        —        —        —        —        —        2,070      2,070   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31, 2013

  —        —        22,111,375      22      183,840      (1   (24,480   159,381   

Issuance of common stock upon exercise of stock options

  —        —        667,024      1      1,952      —        —        1,953   

Issuance of restricted stock units

  —        —        104,874      —        (480   —        —        (480

Issuance of common stock in connection with employee stock purchase plan

  —        —        405,761      —        2,407      —        —        2,407   

Stock-based compensation

  —        —        —        —        7,788      —        —        7,788   

Fair value of stock options attributable to pre-combination services

  —        —        —        —        209      —        —        209   

Unrealized gain on short-term investments, net

  —        —        —        —        —        1      —        1   

Tax windfall on stock-based compensation

  —        —        —        —        (365   —        —        (365

Net loss

  —        —        —        —        —        —        (73,611   (73,611
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31, 2014

  —      $ —        23,289,034    $ 23    $ 195,351    $ —      $ (98,091 $ 97,283   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Consolidated Notes to Financial Statements

 

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AUDIENCE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

    Years Ended December 31,  
    2014     2013     2012  

Cash flows from operating activities

     

Net income (loss)

  $ (73,611   $ 2,070     $ 15,597   

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activites:

     

Depreciation and amortization

    7,893        3,346       1,599   

Write-down of inventory to net realizable value

    1,764        458       2,934   

Provision for doubtful accounts

    117        —          —     

Change in fair value of convertible preferred stock warrants

    —          —          290   

Stock-based compensation

    7,788        5,660       3,134   

Impairment of goodwill

    20,734        —          —     

Impairment of intangible assets

    10,602        —          —     

Excess tax benefit from stock options

    —          (858 )     —     

Deferred income taxes

    1,451        —          (2,013

Loss on disposal of property and equipment

    10        4       86   

Amortization/accretion of marketable securities

    —          69       69   

Non-cash rent expense

    —          663       579   

Changes in assets and liabilities:

     

Accounts receivable

    2,917        7,256       (4,461

Inventories

    (16,341     (614 )     4,042   

Prepaid expenses and other assets

    (1,113     (1,252 )     (1,779

Accounts payable

    (4,475     (3,758 )     2,570   

Accrued and other liabilities

    (1,384     2,275       4,616   

Deferred credits and income

    350        (20 )     (320
 

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

  (43,298   15,299     26,943   
 

 

 

   

 

 

   

 

 

 

Cash flows from investing activities

Acquisition of business, net of cash acquired

  (35,446   —        —     

Payment to escrow agent in connection with acquisition

  (4,200   —        —     

Purchases of property and equipment

  (5,495   (9,080 )   (5,958

Purchases of marketable securities

  (26,994   (21,896 )   (26,098

Proceeds from sales and maturities of marketable securities

  32,850      25,000     8,000   

Change in restricted cash

  195      —        40   
 

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

  (39,090   (5,976 )   (24,016
 

 

 

   

 

 

   

 

 

 

Cash flows from financing activities

Proceeds from initial public offering, net of underwriting discounts and commissions

  —        —        91,548   

Proceeds from exercise of preferred stock warrants

  —        —        400   

Proceeds from exercise of stock options and employee stock purchase plan

  4,360      5,011     2,543   

Tax payments related to RSUs

  (479   (107 )   —     

Excess tax benefit from stock options

  —        858     —     

Payment of deferred offering costs

  —        —        (3,723

Repayment of equipment term loan

  —        —        (103
 

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

  3,881      5,762     90,665   
 

 

 

   

 

 

   

 

 

 

Effect of exchange rate change on cash and cash equivalents

  —        —        31   
 

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

  (78,507   15,085     93,623   

Cash and cash equivalents

Beginning of period

  124,691      109,606     15,983   
 

 

 

   

 

 

   

 

 

 

End of period

$ 46,184    $ 124,691   $ 109,606   
 

 

 

   

 

 

   

 

 

 

Supplemental disclosures:

Cash paid for income taxes

$ 91    $ 1,508   $ 68   

Accrual for purchases of property and equipment

$ 5    $ 1,847   $ —     

Non-cash obligation for property, plant and equipment

$ —      $ —      $ 5,290   

Conversion of convertible preferred stock to common stock

$ —      $ —      $ 74,348   

Conversion of preferred stock warrants to common stock warrants

$ —      $ —      $ 23   

Cashless conversion of common stock warrants to common stock

$ —      $ 23   $ —     

See Notes to Consolidated Financial Statements

 

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AUDIENCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Formation and Business of the Company

Audience, Inc. (the “Company” or “Audience”) was incorporated in the State of California in July 2000 and subsequently reincorporated in the State of Delaware in June 2011. In June 2002, the Company changed its name from Applied Neurosystems Corporation to Audience, Inc. The Company’s common stock is listed on the NASDAQ Global Select Market under the symbol “ADNC.”

Audience is a leader in providing intelligent voice and audio solutions that improve voice quality and the user experience in mobile devices. Its family of earSmart™ intelligent voice processors is based on the processes of human hearing, to suppress background noise and enhance mobile voice quality. Audience’s technology substantially improves the mobile voice experience, while also improving the performance of speech-based services, and enhancing audio quality for multimedia. Audience earSmart™ processors are featured in mobile devices from leading providers in Asia-Pacific, Europe and the United States (“U.S.”). Audience has also started to offer software solutions for motion sensing, such as MotionQ, and voice quality, such as Audience S1.0.

The Company outsources the manufacture of its voice and audio processors to independent foundries and uses third parties for assembly, packaging and test. The Company sells its products globally, directly to original equipment manufacturers (“OEMs”) and their contract manufacturers (“CMs”) and indirectly through distributors. In 2012, Audience also began to recognize license revenue on royalty payments for the use of its semiconductor intellectual property (“processor IP”) in certain mobile phones of a single OEM. In addition, the Company currently licenses software that interprets sensor data related to the motion of mobile devices and has announced its first stand-alone software product that improves sound quality and suppresses background noise, which may lead to the Company recognizing additional licensing revenue in the future.

In April 2012, the Board of Directors and stockholders approved a one-for-30 reverse split of the outstanding common and preferred stock that was effected on April 25, 2012. All share and per share information included in the accompanying financial statements and notes thereto has been adjusted to reflect this reverse stock split.

On May 15, 2012, Audience closed its initial public offering (“IPO”) of 6,060,707 shares of its common stock inclusive of 270,180 shares of common stock sold by certain selling stockholders and the 790,527 shares sold by the Company to satisfy the underwriters’ over-allotment option. The public offering price of the shares sold in the offering was $17.00 per share. The total gross proceeds from the offering to the Company were $98.4 million and after deducting underwriting discounts and commissions, the aggregate net proceeds received by Audience was approximately $91.5 million before deducting offering expenses of $4.5 million. Audience also received $81,000 from the stock options exercised by certain selling stockholders. Upon the closing of the IPO, all shares of Audience’s outstanding convertible preferred stock automatically converted into 13,205,180 shares of common stock and all outstanding warrants to purchase convertible preferred stock automatically converted into warrants to purchase 1,333 shares of common stock. During 2013 these warrants were exercised into common stock.

On July 11, 2014, the Company and its wholly owned subsidiary, Alameda Acquisition Corp., a Delaware corporation, acquired Sensor Platforms, Inc., a Delaware corporation (“Sensor Platforms”) for approximately $41 million. Sensor Platforms develops software and algorithms that interpret sensor data to enable broad context awareness on smart phones, wearables and other consumer devices. (See Note 5 for additional information related to this acquisition).

 

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2. Summary of Significant Accounting Policies

Financial Statement Presentation

The accompanying consolidated financial statements include the accounts of Audience and its wholly owned subsidiaries. These consolidated financial statements were prepared and presented in conformity with U.S. generally accepted accounting principles (“GAAP”). Unless otherwise specified, references to the Company are references to Audience and its consolidated subsidiaries. Intercompany accounts and transactions have been eliminated. Foreign currency gains or losses are recorded as other expenses, net in the consolidated statements of operations.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Such estimates include the allowance for doubtful accounts receivable, inventory write-downs, useful lives of long-lived assets, goodwill, valuation of deferred tax assets and uncertain tax positions, the measurement of stock-based compensation and the valuation of the Company’s various equity instruments. The Company bases its estimates and judgments on its historical experience, knowledge of current conditions and beliefs of what could occur in the future, considering available information. Actual results could differ from those estimates.

Foreign Currency Translation

The Company’s foreign subsidiaries currently use the U.S. dollar as their functional currency. Remeasurement adjustments for non-functional currency monetary assets and liabilities are translated into U.S. dollars at the exchange rate in effect at the balance sheet date. Revenues, expenses, gains or losses are translated at the average exchange rate for the period, and non-monetary assets and liabilities are translated at historical rates. The remeasurement gains and losses of these foreign subsidiaries as well as gains and losses from foreign currency transactions are included in other income (expense), net in the consolidated statements of operations, and are not significant for any periods presented.

Cash, Cash Equivalents, Investments and Restricted Cash

Cash equivalents are investments in highly-rated and highly-liquid money market securities and certain U.S. government sponsored obligations with original maturities of three months or less at the date of purchase. The Company maintains its cash and cash equivalents balances with high quality financial institutions.

The Company classifies its short-term investments as “available-for-sale” and carries them at fair value, with unrealized gains and losses, if any, reported as a separate component of stockholders’ equity (deficit) and included in accumulated other comprehensive income (loss). Realized gains and losses are calculated on the specific identification method and recorded in other income (expense), net. Such investments have original maturities greater than 90 days.

As of December 31, 2014, the Company had $4.2 million of restricted cash deposited in an escrow account as part of total consideration for the acquisition of Sensor Platforms. As of December 31, 2013, the Company maintained $0.2 million of restricted cash in a certificate of deposit account supporting a letter of credit required for a Company’s leased facility.

Fair Value of Financial Instruments

The carrying amounts of the Company’s financial instruments, which include cash equivalents, short-term investments, accounts receivable, accounts payable and other current liabilities, approximate their fair values due

 

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Index to Financial Statements

to their short maturities. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible as well as consider counterparty credit risk.

Accounts Receivable

Accounts receivable are recorded at invoiced amounts and do not bear interest. The Company performs credit evaluations of its customers’ financial condition and generally requires no collateral. Accounts receivable are written off on a case by case basis, net of any amounts that may be collected. The Company reviews its allowance for doubtful accounts by assessing individual accounts receivable over a specific age and amount and all other balances on a pooled basis based on historical collection experience and economic risk assessment. The Company did not incur significant bad debt expense in any of the periods presented.

Revenue Recognition

The Company derives revenue from the direct sale of processors and codecs to OEMs and CMs and indirect sales of processors and codecs to OEMs through distributors. The Company recognizes revenue from sales to CMs and OEMs when persuasive evidence of an arrangement exists, the selling price is fixed or determinable, product delivery has occurred, which is when the risk and reward of ownership pass to the customer, and collectability of the resulting receivable is reasonably assured. The transfer of risk and reward of ownership to the customers is typically complete at the time of shipment as per the Company’s shipping terms. The Company had insignificant revenue from sales of its software products.

The Company does not offer distributors, CMs or OEMs return rights, rebates, price protection or other similar rights. However, in the past, the Company has occasionally accepted returns from distributors. Although the Company does not recognize revenue from sales to its distributors upon shipment, the title and the risk of ownership for the products typically transfers to the distributor upon shipment as per the Company’s shipping terms, and the distributor is obligated to pay for the products at that time. As a result, product revenue is deferred until the distributor notifies the Company in writing of its resale of the products. Deferred revenue less the related cost of the inventories are included in the consolidated balance sheets under “Deferred credits and income.” The Company takes into account the inventories held by its distributors in determining the appropriate level of provision for excess and obsolete inventory.

The Company began to recognize licensing revenue on royalty payments in 2012 on mobile phones integrating its licensed processor IP from a single OEM. The Company recognizes licensing revenue based on mobile phone shipments reported during the quarter, assuming that all other revenue recognition criteria are met. The OEM generally reports shipment information typically within 45 days following the end of the OEM’s quarter. Since there is no reliable basis on which the Company can estimate its licensing revenues prior to obtaining the OEM’s reports from the licensees, the Company recognizes licensing revenues on a one-quarter lag. The amount of revenue recognized is determined by multiplying the number of mobile phones sold during a particular period in which the Company’s processor IP is integrated and enabled by the agreed-upon royalty rate.

Concentration of Risk

The Company’s products are currently manufactured, assembled and tested by third-party foundries and other contractors in Asia. The Company does not have long-term agreements with any of these foundries or contractors. A significant disruption in the operations of one or more of these foundries or contractors would adversely impact the production of Audience’s products for a substantial period of time, which could have a material adverse effect on its business, financial condition, operating results and cash flows.

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash equivalents, short-term investments and accounts receivables. The Company places

 

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substantially all of its cash and cash equivalents on deposit with reputable, high credit quality financial institutions in the United States and therefore bears minimal credit risk. Deposits held with banks may generally be redeemed upon demand and may, from time to time, exceed the limit of federally-backed insurance provided on such deposits. Since inception, the Company has not sustained any material credit losses from instruments held at financial institutions.

The Company’s accounts receivable are derived from direct sales to OEMs and CMs and indirect sales to OEMs through distributors. The Company generally does not require collateral and it establishes an allowance for doubtful accounts based upon the expected collectability of accounts receivable. Substantially all of Audience’s customers are located in Asia and all sales are denominated in U.S. dollars. As of December 31, 2014, two customers accounted for 58% and 14% of total accounts receivable. As of December 31, 2013, three customers comprised 45%, 36% and 15% of total accounts receivable.

In 2014, revenue from Samsung Electronics Co., Ltd. (“Samsung”) and Comtech International Ltd. (“Comtech”), a distributor who sells the Company’s products to end customers, such as Xiaomi, Inc., accounted for 75% and 11%, respectively, of total revenue. In 2013, revenue from Samsung Electronics Co., Ltd (“Samsung”), Apple Inc. (“Apple”), and Comtech accounted for 63%, 21% and 11% of total revenue, respectively. In 2012, revenue from two OEMs, Samsung and Apple and one CM, Foxconn International Holdings, Ltd. and its affiliates (collectively “Foxconn”), accounted for 48%, 27% and 14% of total revenue, respectively. In addition, with respect to the 2011 model of Apple’s mobile phone, Apple transitioned from the purchase of Audience’s processors to licensing of Audience’s processor IP for a royalty. The Company began to recognize licensing revenue in 2012, which accounted for 8%, 6% and 25% of total revenue for 2014, 2013 and 2012, respectively. No other OEM, CM or distributor accounted for 10% or more of total revenue for 2014, 2013 and 2012.

Long-Lived Assets

The Company evaluates its long-lived assets, including intangible assets subject to amortization and property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable from their future cash flows. If the sum of the estimated undiscounted cash flows is less than the carrying value of the assets, the assets will be written down to their estimated fair value.

Property and Equipment

Property and equipment are stated at cost, net of accumulated depreciation and amortization. All property and equipment are depreciated on a straight-line basis over the estimated useful lives of the assets or the term of the related lease, whichever is shorter. Estimates of useful lives are as follows:

 

Computers and equipment 3 years
Machinery and equipment 3 years
Software 3 to 5 years
Furniture and fixtures 3 years
Leasehold improvements 5 years, or remaining life of lease, whichever is shorter

Minor repairs and maintenance are charged to operations as incurred. Upon sale or retirement, the asset’s cost and related accumulated depreciation are removed from the accounts, and any related gain or loss is recorded as an operating expense in the consolidated statements of operations.

During 2012 and 2013, construction in progress included the build-to-suit construction cost of the Company’s headquarters facilities and costs incurred related to the implementation of an enterprise resources planning (“ERP”) system. Pursuant to its headquarters facilities lease agreement, the Company agreed to pay

 

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construction costs in excess of a certain amount and it had certain indemnification obligations related to the construction, resulting in certain build-to-suit accounting requirements. Therefore, the Company had capitalized the cost of the construction as construction in progress with a corresponding obligation for construction in progress in the consolidated balance sheets. Upon lease commencement, the Company concluded that the build-to-suit facility lease qualified for sale-leaseback accounting and determined that it would be treated as a sale-leaseback arrangement and as an operating lease. As of December 31, 2013, both projects were completed and capitalized as property and equipment in the Company’s consolidated balance sheets.

Inventory

Inventories are stated at the lower of cost or market value, cost being determined under the first-in, first-out method. The Company routinely evaluates quantities and values of inventory in light of current market conditions and market trends and records a provision for quantities in excess of demand and product obsolescence. This evaluation may take into consideration expected demand, generally over a 12-month period, new product development schedules, the effect new products might have on the sale of existing products, product obsolescence, product merchantability and other factors.

The Company also regularly reviews the cost of inventories against their estimated market value and records a provision for inventories that have a cost in excess of estimated market value in order to carry those inventories at the lower of cost or market value. The recording of these provisions establishes a new and lower cost basis for each specifically identified inventory item, and the Company does not restore the cost basis to its original level regardless of any subsequent changes in facts or circumstances. Recoveries are recognized only upon the sale of previously written-down inventories.

Business Combinations

The Company allocates the fair value of the purchase consideration of its acquisitions to the tangible assets, liabilities, and intangible assets acquired, based on their estimated fair values. Goodwill represents the excess of acquisition cost over the fair value of tangible and identified intangible net assets of businesses acquired. Transaction costs and costs to restructure the acquired company are expensed as incurred. The operating results of the acquired company are reflected in the Company’s consolidated financial statements after the closing date of the merger or acquisition. See Note 5 for additional information related to the acquisition of Sensor Platforms.

Goodwill

Goodwill represents the excess of the cost of an acquisition over the sum of the amounts assigned to tangible and identifiable intangible assets acquired less liabilities assumed.

The Company evaluates its goodwill, at a minimum, on an annual basis and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company performs its annual goodwill impairment test as of October 1 of each year.

Goodwill is evaluated using a two-step process. First, impairment of goodwill is tested at the reporting unit level by comparing the reporting unit’s carry amount (book value), including goodwill, to the fair value of the reporting unit. The Company has only one reporting unit for the purposes of testing goodwill for impairment. If the carrying amount of the reporting unit exceeds its fair value, a second step is performed to measure the amount of impairment loss, if any. In step two, the Company calculates the implied fair value of goodwill as the excess of the fair value of a reporting unit over the fair values assigned to its assets and liabilities. If the implied fair value of goodwill is less than the carrying value of the reporting unit’s goodwill, the Company recognizes the difference as an impairment charge.

 

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Product Warranty

The Company warrants to its customers that its voice and audio processors will work in accordance with the specifications of each product. Due to the cost and other complexities associated with rectifying any potential product defects, the Company does not repair any returned products. If a product may be defective, the customer notifies the Company and, with Audience’s approval, returns the product. The Company then sends a replacement product to the customer. The Company established a warranty reserve in 2014 to provide for potentially defective products. The Company did not incur significant warranty expense in any of the periods presented.

Shipping and Handling Costs

Shipping and handling costs for inventory purchases and product shipments are classified as a component of cost of revenue in the consolidated statements of operations.

Net Income (Loss) Per Share

For 2014 and 2013, the Company calculated basic net income (loss) per share by dividing the net income (loss) by the weighted average number of shares of common stock outstanding for the period. The diluted net income (loss) per share is computed by giving effect to all potentially dilutive common stock equivalents outstanding for the period. For purposes of this calculation, options to purchase common stock and restricted stock units (“RSUs”) are considered to be common stock equivalents.

For 2012, the Company’s basic and diluted earnings per share are presented in conformity with the two-class method, which is required because the Company issued securities other than common stock that participate in dividends with the common stock (“participating securities”), to compute the earnings per share attributable to common stockholders. The Company determined that it had participating securities in the form of noncumulative convertible preferred stock for the periods up to their conversion immediately prior to the closing of the Company’s IPO on May 15, 2012, when all convertible preferred stock was converted to common stock.

The two-class method requires that the Company calculate the earnings per share using net income attributable to the common stockholders, which will differ from the Company’s net income. Net income attributable to the common stockholders is generally equal to the net income less assumed periodic preferred stock dividends with any remaining earnings, after deducting assumed dividends, to be allocated on a pro rata basis between the outstanding common and preferred stock as of the end of each period. The basic earnings per share attributable to common stockholders is calculated by dividing the net income attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period. The diluted net income per share attributable to common stockholders is computed by giving effect to all potentially dilutive common stock equivalents outstanding for the period. For purposes of this calculation, convertible preferred stock, options to purchase common stock and RSUs are considered to be common stock equivalents.

Internally-developed Capitalized Software

Development costs of computer software to be sold, leased, or otherwise marketed are subject to capitalization beginning when a product’s technological feasibility has been established and ending when a product is available for general release to customers. To date, the period between achieving technological feasibility, which the Company has defined as the establishment of a working model that typically occurs when beta testing commences and the general availability of such software, has been short and software development costs qualifying for capitalization have been insignificant. The Company has not capitalized any software development costs since its inception.

Research and Development

Research and development costs are expensed as incurred. Research and development expenses consist primarily of personnel costs, product development costs, which include engineering services, development

 

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software and hardware tools, license fees, cost of fabrication of masks, other development materials costs, depreciation of equipment used in research and development, and allocation of facilities costs.

Nonrecurring engineering services, which the Company bills to OEMs from time to time for cost reimbursement, are recorded in “Deferred credits and income” on the consolidated balance sheets until acceptance, which is upon cash receipt, at which point they are reflected as a reduction of research and development costs in accordance with the provisions of each agreement. During 2014, the Company had no such nonrecurring engineering services that were billed to OEMs for cost reimbursement and recorded no reduction in research and development costs relating thereto. During 2013 and 2012, the Company recorded as a reduction of research and development expenses, reimbursements for such services totaling $0.4 million and $1.7 million, respectively.

Income Taxes

The Company accounts for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the difference between the tax basis of assets and liabilities and their reported amounts using enacted tax rates in effect for the year in which the differences are expected to reverse. The measurement of deferred tax assets is reduced by a valuation allowance if, based upon available evidence, it is more-likely-than-not that some or all of the deferred tax assets will not be realized. Likewise, if it later determines that it is more-likely-than-not that the net deferred tax assets would be realized, the Company would reverse the applicable portion of the previously provided valuation allowance.

The Company recognizes the impact of a tax position in the consolidated financial statements that, based on its technical merits, is more-likely-than-not to be sustained upon examination. The evaluation of a tax position in accordance with this interpretation is a two-step process – recognition and measurement. In the first step, the Company’s determination of whether it is more- likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, is based on the technical merits of the position. The second step addresses measurement of a tax position that meets the more-likely-than-not criterion. The tax position is measured at the largest amount of benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold will be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold will be derecognized in the first subsequent financial reporting period in which that threshold is no longer met.

The Company includes interest and penalties related to unrecognized tax benefits within its provision for income taxes. The Company has not incurred any interest or penalties nor has it recorded any foreign exchange gains or losses related to unrecognized tax benefits in any of the periods presented.

The Company does not provide for a U.S. income tax liability on undistributed earnings of the Company’s foreign subsidiaries as such amounts are indefinitely reinvested in non-U.S. operations. As of December 31, 2014 the Company had $0.4 million of undistributed foreign earnings and no cash distributions were made from the Company’s foreign subsidiaries. The determination of the amount of deferred taxes on these earnings is not practicable since the computation would depend on a number of factors that cannot be known unless a decision is made to repatriate the earnings.

Advertising Expense

All advertising costs are expensed as incurred. Advertising expenses were immaterial during all of the periods presented.

 

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Leases

The Company recognizes operating lease rent expense on a straight-line basis over the term of the applicable lease. The difference between rent expense and rent paid is recorded as deferred rent and is included in “Accrued and other current liabilities” for the current portion, and “Other liabilities- noncurrent” for the long-term portion in the accompanying consolidated balance sheets.

Pursuant to its headquarters facilities lease agreement, the Company agreed to pay construction costs in excess of a certain amount and it had certain indemnification obligations related to the construction, resulting in certain build-to-suit accounting requirements. Upon lease commencement, the Company concluded that the build-to-suit facility lease qualifies for sale-leaseback accounting and determined that it would be treated as a sale-leaseback arrangement and as an operating lease.

Stock-Based Compensation

The Company maintains stock plans covering a broad range of equity grants including stock options and RSUs. In addition, the Company sponsors an employee stock purchase plan (“ESPP”), whereby eligible employees are entitled to purchase common stock semi-annually, by means of limited payroll deductions, at a 15% discount from the fair market value of the common stock as of specific dates.

The Company measures stock-based compensation at the grant date based on the fair value of the stock option and employee stock purchase rights under the ESPP using the Black-Scholes-Merton (“BSM”) option pricing model. The fair value is recognized as an expense on a straight-line basis over the requisite service period, which is generally the vesting period. The fair value of stock options the Company grants to nonemployees is estimated based on the fair market value on each vesting date, and is remeasured at each reporting period until the services required under the arrangement are completed.

Determining the fair value of stock options and ESPP grants at the grant date requires the input of various assumptions, including the fair value of the underlying common stock, expected future share price volatility and expected term. The assumptions used in calculating the fair value of stock options and ESPP grants represent the Company’s best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and the Company uses different assumptions, the Company’s stock-based compensation expense could be materially different in the future. In addition, the Company is required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. The Company estimates the forfeiture rate based on historical experience of its stock options that are granted, exercised and cancelled. If the actual forfeiture rate is materially different from the Company’s estimate, stock-based compensation expense in future periods could be significantly different from what was recorded in the current period. Following is a description of the valuation assumptions used by the Company to determine the fair value of its stock options and ESPP grants:

Risk-Free Interest Rate. The Company bases the risk-free interest rate used in the BSM valuation method on implied yield currently available on the U.S. Treasury zero-coupon issues with an equivalent term. Where the expected terms of the Company’s stock options do not correspond with the terms for which interest rates are quoted, the Company uses an approximation based on rates on the closest term currently available.

Expected Volatility. The expected volatility is based primarily on the historical stock volatilities of a group of publicly listed guideline companies over a period equal to the expected terms of the stock options and ESPP grants since the Company has limited trading history to use in determining the volatility of its common stock.

Expected Term. Expected term represents the period over which the Company anticipates stock options and ESPP grants to be outstanding. The expected term of the stock options is based on the simplified method as neither relevant historical experience nor other relevant data are available to estimate future exercise behavior. Under the simplified method, the expected term is equal to the average of the stock options’ weighted average

 

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Index to Financial Statements

vesting period and its contractual term. The Company expects to continue using the simplified method until it has sufficient information. The expected term of ESPP grants is based upon the length of each respective purchase period.

Expected Dividend Yield. The Company has never paid cash dividends on its common stock and does not expect to pay dividends on its common stock.

RSUs. Stock-based compensation expense for RSUs is measured based on the closing fair market value of the Company’s common stock on the date of grant and expensed on a straight-line basis over the requisite service period.

Comprehensive Income (Loss)

Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period, from transactions and other events and circumstances from non-owner sources. For all periods presented, the difference between net income and comprehensive income (loss) was due to currency translation adjustments and unrealized gain/(loss) from marketable securities.

Recent Accounting Pronouncements

In January 2015, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update (“ASU”) which simplifies income statement classification by removing the concept of extraordinary items from GAAP. As a result, items that are both unusual and infrequent will no longer be separately reported net of tax after continuing operations. The new standard is effective for the fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The Company does not expect to early adopt this guidance and does not believe that the adoption of this guidance will have a material impact on its consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 will explicitly require management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosure in certain circumstances. The new standard will be effective for all entities in the first annual period ending after December 15, 2016. Early adoption is permitted. The Company does not expect to early adopt this guidance and does not believe that the adoption of this guidance will have a material impact on its consolidated financial statements.

In May 2014, the FASB and the International Accounting Standards Board (“IASB”) issued a converged standard on revenue recognition from contracts with customers. The objective of the new guidance is to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability within industries, across industries, and across capital markets. The newly converged standard contains principles that will be applied to determine how revenue should be measured and the timing of when it should be recognized. The guidance is effective for fiscal years, and interim periods within fiscal years, beginning after December 15, 2016. Early adoption is not permitted. The Company is currently evaluating the impact that this guidance may have on its financial position, results of operations and cash flows.

In July 2013, the FASB issued final guidance on the presentation of certain unrecognized tax benefits in the financial statements. Under the new guidance, a liability related to an unrecognized tax benefit would be offset against a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In that case, the liability associated with the unrecognized tax benefit is presented in the financial statements as a reduction to the related deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning on or after

 

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December 15, 2014 because the Company is an emerging growth company under the JOBS Act and has elected to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. Early adoption is permitted. The Company did not elect for an early adoption of this new guidance. Upon adoption of the guidance in 2015, the Company plans to offset $0.3 million of the unrecognized tax benefits in noncurrent taxes payable with the related deferred tax asset.

3. Balance Sheet Components

Inventories

Inventories consisted of the following:

 

     December 31,  
     2014      2013  
     (in thousands)  

Work in process

   $ 19,828       $ 4,115   

Finished goods

     8,171         9,307   
  

 

 

    

 

 

 

Total inventory

$ 27,999    $ 13,422   
  

 

 

    

 

 

 

Property and Equipment, net

Property and equipment, net consisted of the following:

 

     December 31,  
     2014     2013  
     (in thousands)  

Computers and equipment

   $ 4,346      $ 3,582   

Machinery and equipment

     6,561        4,774   

Software

     4,294        3,835   

Furniture and fixtures

     4,821        4,738   

Leasehold improvements

     3,251        3,619   

Construction in progress

     81        35   
  

 

 

   

 

 

 

Gross property and equipment

  23,354      20,583   

Accumulated depreciation

  (11,720   (7,050
  

 

 

   

 

 

 

Property and equipment, net

$ 11,634    $ 13,533   
  

 

 

   

 

 

 

Depreciation expense was $5.6 million, $3.3 million and $1.6 million for 2014, 2013 and 2012, respectively.

Accrued and Other Current Liabilities

Accrued and other current liabilities consisted of the following:

 

     December 31,  
     2014      2013  
     (in thousands)  

Compensation

   $ 4,165       $ 5,221   

Professional fees

     972         811   

Income taxes payable

     544         648   

Escrow payable

     4,200         —     

Liability related to facility build-out

     —           1,539   

Other

     2,183         2,454   
  

 

 

    

 

 

 

Accrued and other current liabilities

$ 12,064    $ 10,673   
  

 

 

    

 

 

 

 

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4. Fair Value of Financial Instruments

The Company invests its excess cash primarily in U.S. government agency and treasury notes and money market funds that mature within one year. All cash equivalents and short-term investments are classified as available-for-sale.

The amortized cost and fair value of available-for-sale securities at December 31, 2014 and 2013 were as follows:

 

     December 31, 2014  
     Amortized Cost      Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  
     (in thousands)  

Money market funds

   $ 23,715       $ —        $ —       $ 23,715   

U.S. agency securities

     8,998         1        —         8,999   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available-for-sale securities

$ 32,713    $ 1    $ —     $ 32,714   
  

 

 

    

 

 

    

 

 

   

 

 

 
     December 31, 2013  
     Amortized Cost      Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  
     (in thousands)  

Money market funds

   $ 90,230       $ —        $ —       $ 90,230   

U.S. agency securities

     14,859         —           (4 )     14,855   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available-for-sale securities

$ 105,089    $ —      $ (4 ) $ 105,085   
  

 

 

    

 

 

    

 

 

   

 

 

 

Available-for-sale securities are reported at fair value on the balance sheets and classified as follows:

 

     December 31,  
     2014      2013  
     (in thousands)  

Cash equivalents

   $ 23,715       $ 90,230   

Short-term investments

     8,999         14,855   
  

 

 

    

 

 

 

Total available-for-sale securities

$ 32,714    $ 105,085   
  

 

 

    

 

 

 

Audience invests in high quality, highly liquid debt securities that mature within one year. The Company holds all of its marketable securities as available-for-sale and marks them to market. As of December 31, 2014, the unrealized gain of the Company was immaterial. The gains or losses realized from sales of securities were immaterial in the periods presented.

 

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Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. Fair value hierarchy is based on three levels of inputs that may be used to measure fair value, of which the first two are considered observable and the last unobservable:

 

Level 1—

Quoted prices in active markets for identical assets or liabilities.

Level 2—

Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

As there were no financial liabilities measured at fair value on a recurring basis, the following tables summarize the Company’s financial assets measured at fair value on a recurring basis within the fair value hierarchy:

 

     December 31, 2014  
     Total      Level 1      Level 2      Level 3  
     (in thousands)  

Cash equivalents:

           

Money market funds

   $ 23,715       $ 23,715       $ —        $ —    

Short-term investments:

           

U.S. agency securities

     8,999         8,999         —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale marketable securities

$ 32,714    $ 32,714    $ —     $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2013  
     Total      Level 1      Level 2      Level 3  
     (in thousands)  

Cash equivalents:

           

Money market funds

   $ 90,230       $ 90,230       $ —        $ —    

Short-term investments:

           

U.S. agency securities

     14,855         14,855         —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale marketable securities

$ 105,085    $ 105,085    $ —     $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

5. Acquisition of Sensor Platforms

On July 11, 2014, the Company completed the acquisition contemplated by the Agreement and Plan of Merger (the “Agreement”) by and among the Company, Alameda Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of the Company (“Merger Sub”), Sensor Platforms, and the stockholders’ agent listed therein (the “Acquisition”). Sensor Platforms develops software and algorithms that interpret sensor data to enable broad context awareness on smart phones, wearables and other consumer devices. The Company believes the combination of Sensor Platforms’ motion sensing technology with its voice and audio solutions places the combined company in a unique position to deliver compelling solutions based on the fusion of voice and motion.

The Company incurred $0.5 million in transaction costs. These expenses were included in selling, general and administrative expenses in the Company’s consolidated statement of operations.

 

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The Acquisition was accounted for using the acquisition method of accounting and accordingly, Sensor Platforms’ results of operations were included in the Company’s consolidated financial statements from July 11, 2014. Pursuant to the acquisition method of accounting, the purchase price has been allocated to assets acquired and liabilities assumed based on their respective fair values. The Company’s management has determined the fair value of the intangible and tangible assets acquired and liabilities assumed as of the closing date of the Acquisition. The difference between the fair value of the consideration issued and the fair value of the assets acquired and liabilities assumed was recorded as goodwill.

The fair value of consideration transferred to acquire Sensor Platforms was approximately $41 million and consisted of the following, in thousands:

 

Cash consideration paid to acquire Sensor Platforms

$ 40,486   

Fair value of employee stock options assumed

  209   
  

 

 

 

Total acquisition consideration

$ 40,695   
  

 

 

 

The Company deposited $4.2 million of the cash consideration into an escrow account. This amount is reflected in the restricted cash and accrued and other current liabilities line items in the consolidated balance sheet. The escrow period is one year from the date of the Acquisition.

Sensor Platforms’ employee stock options and RSUs assumed

In connection with the Acquisition, the Company assumed both vested and unvested, in-the-money stock options and unvested RSUs originally granted by Sensor Platforms and exchanged them for stock options and RSUs for the Company’s common stock. The Company included $0.2 million, representing the portion of the fair value of the assumed Sensor Platforms vested stock options associated with service rendered prior to the acquisition date, as a component of the total acquisition consideration.

Purchase price allocation

The following table summarizes the estimated fair value of tangible and intangible assets acquired and liabilities assumed as of the date of the Acquisition, in thousands:

 

Purchase price allocated to:

Cash and cash equivalents

$ 841   

Accounts receivable

  152   

Prepaid expenses and other current assets

  289   

Property and equipment

  42   

Acquired intangibles

  19,000   

Goodwill

  20,734   

Other assets

  41   

Accounts payable

  (24

Accrued expenses

  (181

Deferred revenue

  (110

Deferred tax liability

  (89
  

 

 

 

Total acquisition consideration

$ 40,695   
  

 

 

 

The total estimated fair value of $19.0 million for intangible assets acquired were related to developed technology of $18.0 million and customer relationships of $1.0 million. The estimated fair values of the developed technology and customer relationship intangible assets were determined using the income approach (through the with-and-without method) and cost approach (through the replacement cost method), respectively.

The goodwill resulting from the Acquisition is not deductible for tax purposes.

 

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Unaudited pro forma financial information

The unaudited pro forma financial information for 2014 and 2013 presented below includes the effects of pro forma adjustments as if Sensor Platforms was acquired on January 1, 2013. The non-recurring pro forma adjustments are primarily related to fair value adjustments to intangible assets, transactions costs and assumed equity awards. The pro forma financial information does not include any anticipated synergies or other expected benefits of the acquisition. The table below is for informational purposes only and is not indicative of future operations or results that would have been achieved had the acquisition been completed as of January 1, 2013.

 

     Year Ended December 31,  
     2014     2013  
     (in thousands, except per share amounts)  

Pro forma revenues

   $ 113,660      $ 160,894   
  

 

 

   

 

 

 

Pro forma net loss

$ (45,055 $ (5,685
  

 

 

   

 

 

 

Pro forma net loss per share — diluted

$ (1.99 $ (0.26
  

 

 

   

 

 

 

6. Goodwill and Intangible Assets, Net

The Company performed its annual goodwill impairment test as of October 1, 2014 which did not result in an impairment of goodwill.

As a result of a significant drop in the Company’s trading prices of the Company’s common stock in the public stock market during the three months ended December 31, 2014, the Company performed impairment analyses on both its goodwill and long-lived assets as of November 1, 2014. Based on the results of the impairment analyses, the Company recorded impairment charges of $20.7 million for goodwill, $10.5 million for the developed technology intangible asset and $0.1 million for the customer relationships intangible asset. The total impairment charge of $31.3 million is shown as a separate line item in the Company’s consolidated statement of operations for 2014.

The $20.7 million goodwill impairment charge represented the excess of the carrying value of the goodwill over the implied goodwill (which was calculated as the excess of the fair value of the reporting unit over the fair values of the reporting unit’s assets and liabilities). The fair value of the reporting unit was calculated using the market approach whereby the Company considered its market capitalization and control premiums for acquisition-related transactions in its industry.

The $10.5 million developed technology intangible asset impairment charge represented the excess of the carrying value of the developed technology intangible asset over the fair value of the developed technology intangible asset, which was determined using the royalty relief method.

In connection with the impairment analyses, the Company reduced the estimated useful life of the developed technology intangible asset from approximately five years to two years. The reduction in the estimated useful life was due to a reduction in the period, over which the Company expects to receive benefits from the developed technology. The estimated useful life of the customer relationships intangible asset remained at one year.

Goodwill

The following table shows the changes in the carrying amount of goodwill relating to the Acquisition, in thousands:

 

Balance, December 31, 2013

$ —     

Addition related to acquisition

  20,734   

Goodwill impairment

  (20,734
  

 

 

 

Balance, December 31, 2014

$ —     
  

 

 

 

 

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Intangible Assets, net

As of December 31, 2014, the balance of each of the intangible assets acquired in connection with the Acquisition was as follows (in thousands):

 

     December 31, 2014  
     Gross
Carrying
Amount
     Accumulated
Amortization
     Net
Carrying
Amount
 

Developed technology

   $ 7,494       $ (1,627    $ 5,867   

Customer relationships

     904         (454      450   
  

 

 

    

 

 

    

 

 

 
$ 8,398    $ (2,081 $ 6,317   
  

 

 

    

 

 

    

 

 

 

Amortization expense relating to developed technology included in total cost of revenue for 2014 was approximately $1.6 million. Amortization expense relating to customer relationships included in total selling, general and administrative expenses for 2014 was approximately $0.5 million.

The estimated future amortization expense of intangible assets as of December 31, 2014 was as follows (in thousands):

 

2015

$ 3,650   

2016

  2,667   
  

 

 

 

Total

$ 6,317   
  

 

 

 

7. Net Income (Loss) Per Share

The following table sets forth the computation of the Company’s basic and diluted net income (loss) per share for 2014, 2013 and 2012:

 

     Year Ended December 31,  
     2014     2013      2012  
     (in thousands, except per share amounts)  

Numerator:

       

Net income (loss)

   $ (73,611   $ 2,070       $ 15,597   

Non-cumulative dividends to preferred stockholders

     —         —           (2,247

Undistributed earnings allocated to preferred stockholders

     —         —          (3,583
  

 

 

   

 

 

    

 

 

 

Net income (loss) — basic

  (73,611   2,070      9,767   

Adjustment for undistributed earnings reallocated to the holders of common stock

  —       —        402   
  

 

 

   

 

 

    

 

 

 

Net income (loss) — diluted

$ (73,611 $ 2,070    $ 10,169   
  

 

 

   

 

 

    

 

 

 

Denominator:

Weighted average shares used in computing net income (loss) per share:

Basic

  22,683      21,467      13,377   

Weighted average effect of dilutive stock options:

  —       1,728      2,309   

Weighted average effect of dilutive restricted stock units:

  —       2      —    

Weighted average effect of dilutive stock warrants:

  —       —        1  
  

 

 

   

 

 

    

 

 

 

Diluted

  22,683      23,197      15,687   
  

 

 

   

 

 

    

 

 

 

Net income (loss) per share:

Basic

$ (3.25 $ 0.10    $ 0.73   
  

 

 

   

 

 

    

 

 

 

Diluted

$ (3.25 $ 0.09    $ 0.65   
  

 

 

   

 

 

    

 

 

 

 

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The following potentially dilutive outstanding shares of common stock equivalents subject to options, RSUs and ESPP grants were excluded from the computation of diluted net income (loss) per share of common stock for the periods presented because including them would have been antidilutive:

 

     Year Ended December 31,  
     2014      2013      2012  
     (in thousands)  

Stock options

     4,299         1,835         1,419   

Restricted stock units

     942         213         18   

Employee stock purchase plan grants

     474         —           —     
  

 

 

    

 

 

    

 

 

 

Total

  5,715      2,048      1,437   
  

 

 

    

 

 

    

 

 

 

8. Commitments and Contingencies

Leases

The Company leases office space under noncancelable agreements with various expiration dates through October 31, 2023. Rent expense was $5.2 million, $4.7 million and $2.9 million for 2014, 2013 and 2012, respectively.

On June 5, 2012, the Company entered into a lease agreement for its corporate headquarters, which consists of 87,565 square feet in Mountain View, California. The lease for this facility commenced on October 1, 2013. The contractual annual base payment is $3.7 million subject to a full abatement of payment for the first month of the lease term. The annual base payment increases 3% each year. The lease term is for ten years with an option to extend for an additional five years. As of December 31, 2013, the Company had completed the build-out for its corporate headquarters and had taken occupancy of that facility. It is treated as a sale-leaseback arrangement and as an operating lease for accounting purposes.

Future minimum lease payments under noncancelable operating leases as of December 31, 2014 were as follows:

 

Fiscal year ending December 31,

   Amount
(in thousands)
 

2015

   $ 4,844   

2016

     4,539   

2017

     4,240   

2018

     4,170   

2019

     4,296   

Thereafter

     17,274   
  

 

 

 

Total minimum lease payments

$ 39,363   
  

 

 

 

Purchase commitments

The Company subcontracts with other companies to manufacture its voice and audio processors. The Company may generally cancel these purchase commitments at any time; however, the Company is required to pay all costs incurred through the cancellation date. The Company rarely cancels these agreements once production has started. As of December 31, 2014 the Company had $26.6 million in open purchase commitments with its third-party foundries and other suppliers.

Noncurrent Gross Unrecognized Tax Benefits

As of December 31, 2014, the Company had $1.1 million of non-current gross unrecognized tax benefits that are reflected in income taxes payable- noncurrent in the consolidated balance sheets. The timing of any

 

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payments that could result from these unrecognized tax benefits will depend upon a number of factors. Accordingly, the Company is not able to provide a reasonable estimate of the timing of future payments relating to these obligations.

Litigation

From time to time, the Company may be subject to legal proceedings and claims in the ordinary course of business. The Company received, and may in the future continue to receive, claims from third parties asserting infringement of their intellectual property rights. Future litigation may be necessary to defend the Company and its customers by determining the scope, enforceability and validity of third party proprietary rights or to establish the Company’s proprietary rights. The Company has also received a complaint which purports to be brought on behalf of a class of purchasers of its common stock issued in or traceable to the Company’s IPO which contains claims under Sections 11, 12(a)(2) and 15 of the Securities Act. There can be no assurance with respect to the outcome of any current or future litigation brought against the Company or pursuant to which it has indemnification obligations and the outcome could have a material adverse impact on its business, financial condition, operating results and cash flows.

On September 13, 2012, a purported shareholder filed a class action complaint in the Superior Court of the State of California for Santa Clara County against the Company, the members of its board of directors, two of its executive officers and the underwriters of its IPO. An amended complaint was filed on February 25, 2013, which purports to be brought on behalf of a class of purchasers of the Company’s common stock issued in or traceable to the IPO. On April 3, 2013, the outside members of the board of directors and the underwriters were dismissed without prejudice. The amended complaint added additional shareholder plaintiffs and contains claims under Sections 11 and 15 of the Securities Act. The complaint seeks, among other things, compensatory damages, rescission and attorney’s fees and costs. On March 1, 2013, defendants responded to the amended complaint by filing a demurrer moving to dismiss the amended complaint on the grounds that the court lacks subject matter jurisdiction. The court overruled that demurrer. On March 27, 2013, defendants filed a demurrer moving to dismiss the amended complaint on other grounds. The Court denied the demurrer on September 4, 2013. On January 16, 2015, the court granted plaintiff’s motion to certify a class. A trial has been scheduled for September 15, 2015. The Company believes that the allegations in the complaint are without merit and intends to vigorously contest the action. However, there can be no assurance that the Company will be successful in its defense and it cannot currently estimate a range of any possible losses the Company may experience in connection with this case. Accordingly, the Company is unable at this time to estimate the effects of this complaint on its business, financial condition, operating results and cash flows.

Indemnities, Commitments and Guarantees

During the normal course of business, the Company may make certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. The Company has not recorded any liability for these indemnities, commitments and guarantees in the accompanying consolidated balance sheets. Where necessary, the Company accrues for losses for any known contingent liabilities, including those that may arise from indemnification provisions, when future payment is probable and estimable.

9. Benefit Plan

The Company has a 401(k) Profit Sharing Plan (the “401(k) Plan”) qualified under Section 401(k) of the Internal Revenue Code of 1986, as amended (“Internal Revenue Code”). Each eligible employee may elect to contribute up to the maximum amount allowed by the Internal Revenue Code. The Company, at the discretion of its Board of Directors, may match employee contributions to the 401(k) Plan. The Company made no matching contributions to the 401(k) Plan for 2014, 2013 and 2012.

 

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10. Equity Benefits Plans and Stock-based Compensation

The Company accounts for stock-based awards in accordance with the provisions set forth in the revised accounting guidance which requires the measurement and recognition of compensation expense for all stock-based payment awards made to the Company’s employees and directors including employee stock options, RSUs, employee stock purchases made under the Company’s employee stock purchase plan and performance share awards granted to selected members of the Company’s senior management based on estimated fair values.

Employee Stock Purchase Plan

Effective May 15, 2012, the Company adopted the ESPP. The ESPP allows participants to contribute up to 15% of their eligible compensation to purchase shares of the Company’s common stock at 85% of the lower of the fair market value of the Company’s common stock on the first trading day of each offering period or on the exercise date. Shares authorized for issuance in connection with the ESPP are subject to an automatic annual increase of the lesser of (i) 1% of the outstanding shares of common stock of the Company as of the first day of the year, (ii) 249,328 shares of common stock or (iii) such amount determined by the Compensation Committee of the Company’s Board of Directors. As of December 31, 2014, the Company had authorized 881,508 shares for the ESPP and had 70 shares of common stock available for future issuance. Under the ESPP, during 2014 and 2013, participants purchased 405,761 shares for a weighted average price of $5.94 per share and 320,997 shares for a weighted average price of $7.48 per share, respectively.

The Company’s executive officers and its other employees are permitted to participate in the ESPP. The ESPP will automatically terminate in 2031, unless the Company terminates it sooner. The ESPP provides for an offering and purchase period of approximately six months in duration, except for the Company’s first offering period which commenced on the completion of the Company’s IPO and ended on the close of trading on November 16, 2012.

On September 19, 2013, the Company’s Compensation Committee approved an amendment to the ESPP for the purposes of: (i) extending the term of each offering period from six months to 24 months, effective with the offering period commencing in November 2013, with four six month purchase periods, (ii) providing for overlapping offering periods, such that a new offering period will start every six months, commencing in November 2013, and (iii) providing for automatic withdrawal of all participants from an offering period if the closing sales price of the Company’s common stock on the last day of a purchase period is lower than the closing sales price on the first day of the related offering period and the automatic re-enrollment of such withdrawn participants into a new offering period commencing immediately thereafter.

Incentive Compensation Plans

In March 2011 and June 2011, the Board of Directors and the Company’s stockholders approved the Company’s 2011 Equity Incentive Plan (the “2011 Plan”), as subsequently amended and restated, to replace the Company’s 2001 Stock Plan (the “2001 Plan”) (together, the “Plans”). The 2011 Plan is now the Company’s only plan for providing stock-based incentive compensation, which is available to eligible employees, executive officers and non-employee directors and consultants. Under the 2011 Plan, the Board of Directors may issue stock appreciation rights, restricted stock, RSUs, incentive stock options and nonqualified stock options. The 2011 Plan provides for an annual increase on the first day of each year beginning January 1, 2013 equal to the lesser of: (i) 1,101,649, (ii) 4.5% of the outstanding shares of common stock as of the last day of the immediately preceding year; or (iii) such other amount as the Board of Directors may determine. The 2011 Plan requires the Board of Directors to grant options at an exercise price not less than fair market value of its common stock on the date of grant. For employees holding more than 10% of the voting rights of all classes of stock, the exercise prices for incentive and nonqualified stock options may not be less than 110% of fair market value of the Company’s common stock on the date of grant. The options are generally exercisable over four years. Although the vesting provisions of individual options may vary, options granted under the 2011 Plan must provide for vesting of at least 20% per year. The 2011 Plan provides that the term of the options shall be no more than

 

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Index to Financial Statements

10 years from the date of the grant. Upon termination of employment, all unvested options are cancelled and returned to the 2011 Plan. In general, RSUs granted under the 2011 Plan vest over four years, based on continued employment and are settled upon vesting in shares of the Company’s common stock on a one-for-one basis. As of December 31, 2014, the Company had authorized 4,441,005 shares for the Plans. Under the 2011 Plan, the number of shares available for grant was 254,712 shares as of December 31, 2014.

In connection with the Acquisition, the Company assumed the Sensor Platforms 2004 Stock Option Plan (the “Option Plan”), pursuant to which it may make future inducement grants. The Option Plan provides for the grant of incentive and nonstatutory stock options to employees, nonemployee directors, and consultants of the Company. Options granted under the Option Plan generally become exercisable ratably over a four-year period following the date of grant and expire ten years from the date of grant. At the discretion of the Company’s Board of Directors, certain options may be exercisable immediately at the date of grant but are subject to a repurchase right, under which the Company may buy back any unvested shares at their original exercise price in the event of an employee’s termination prior to full vesting. All other options are exercisable only to the extent vested. Vested and outstanding options to purchase Sensor Platforms’ common stock held by certain Sensor Platforms employees at the time of the Acquisition were assumed by the Company and converted into options to purchase shares of the Company’s common stock based on an option exchange ratio. The Company assumed both vested and unvested, in-the-money stock options and unvested RSUs originally granted by Sensor Platforms and exchanged them for stock options and RSUs of the Company’s common stock. The Company included $0.2 million, representing the portion of the fair value of the assumed Sensor Platforms vested stock options associated with service rendered prior to the acquisition date, as a component of the total acquisition consideration (See Note 5 for additional information related to the Acquisition).

A summary of the Company’s option activities under the 2011 Plan is as follows:

 

     Outstanding Options  
     Number of
Shares
    Weighted
Average
Exercise Price
     Weighted Averaqe
Remaining
Contractual Life
     Aggregate
Intrinsic
Value(1)
 
                  (in years)      (in thousands)  

Balances at December 31, 2013

     4,398,918      $ 8.12         7.3       $ 19,421   

Options granted

     613,824      $ 10.88         

SPI options assumed

     44,910      $ 2.17         

Options exercised

     (667,024   $ 2.93         

Options cancelled

     (616,883   $ 12.35         
  

 

 

         

Balances at December 31, 2014

  3,773,745    $ 8.73      6.8    $ 2,696   
  

 

 

         

Exercisable at December 31, 2014

  2,533,861    $ 7.00      6.0    $ 2,655   
  

 

 

         

Vested and expected to vest at December 31, 2014

  3,633,998    $ 8.58      6.4    $ 2,692   
  

 

 

         

 

(1) The intrinsic value of options represents the difference between the in-the-money exercise price and the market value of its common stock. The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value for in-the-money options at December 31, 2014 and 2013, based on the closing stock prices of the Company’s common stock of $4.40 and $11.64, respectively.

Total intrinsic value of options exercised was $4.4 million, $8.7 million and $4.5 million during 2014, 2013 and 2012, respectively. The weighted average per share grant date fair value of options granted was $4.40, $5.09 and $5.48 for 2014, 2013 and 2012, respectively.

At December 31, 2014, the Company had $5.7 million of total unrecognized compensation expense, net of estimated forfeitures, related to unvested stock options, which is expected to be recognized over a weighted average period of 3.1 years.

 

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The following table summarizes additional information about stock options outstanding and exercisable as of December 31, 2014:

 

     Options Outsanding      Options Exercisable  

Range of

Exercise

Price

   Number
Outstanding
     Weighted
Average
Remaining
Contractual
Life
     Weighted
Average
Exercise
Price
     Number
Exercisable
     Weighted
Average
Remaining
Contractual
Life
     Weighted
Average
Exercise
Price
 
                 
                 
                 
                 
            (in years)             (inyears)                

$0.60 - $1.64

     337,472         2.5       $ 0.86         322,807         2.2       $ 0.82   

$2.40 - $5.10

     1,068,290         5.3         3.13         1,055,541         5.3         3.11   

$5.82 - $9.30

     310,056         8.5         8.01         139,859         8.0         7.94   

$9.94 - $14.91

     1,972,400         7.8         12.91         965,987         7.2         12.73   

$15.30 - $18.29

     85,527         7.6         15.71         49,667         7.5         15.63   
  

 

 

          

 

 

       
  3,773,745      6.8      8.73      2,533,861      6.0      7.00   
  

 

 

          

 

 

       

Restricted Stock Units

RSUs are share awards that entitle the holder to receive shares of the Company’s common stock upon vesting and generally vest over periods not exceeding four years from the date of grant.

A summary of the Company’s RSU activity under the 2011 Plan is as follows:

 

     Number of
Shares
    Weighted
Average
Grant Date
Fair Value
 

RSUs outstanding at December 31, 2013

     354,055     $ 13.84   

RSUs granted

     1,410,488        8.07   

SPI RSUs assumed

     208,630        11.45   

RSUs released

     (154,265     12.85   

RSUs cancelled/forfeited

     (335,992     11.41   
  

 

 

   

RSUs outstanding at December 31, 2014

  1,482,916      8.67   
  

 

 

   

In connection with the Acquisition, the Company assumed the RSUs granted to each continuing employee of Sensor Platforms, upon the closing of the acquisition, for an aggregate of 208,630 shares of common stock. These RSUs were granted outside of the existing Audience stock plans and without stockholder approval pursuant to NASDAQ Marketplace Rule 5635(c)(4) with the following terms: 150,147 of the granted RSUs will vest over three years; and 58,483 of the RSUs will vest over four years, in either case subject to continued service with Audience or any subsidiary of Audience.

The weighted average per share grant date fair value of RSUs granted during 2014, 2013 and 2012 was $8.07, $13.65 and $21.88, respectively. The fair value of RSUs released during 2014 and 2013 was $1.4 million and $0.5 million, respectively. No RSUs were released during 2012.

At December 31, 2014, total unrecognized estimated compensation expense related to unvested RSUs granted was $11.5 million, which is expected to be recognized over a weighted-average period of 2.9 years.

Performance-based Option Awards

The Company did not grant any performance-based option awards during 2014. In February 2013, the Compensation Committee of the Board of Directors approved a performance option grant of 180,000 shares to

 

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Index to Financial Statements

the Company’s chief executive officer. The vesting of these shares is contingent on the Company’s stock trading at or above four predetermined stock prices of $25, $30, $35 and $40 for 30 days, at which dates vesting periods for each tranche of 45,000 shares will commence at a rate of 1/12 of that tranche’s shares per month for 12 months.

Stock-Based Compensation

The following table shows a summary of the stock-based compensation expense included in the consolidated statements of operations for 2014, 2013 and 2012:

 

     Year Ended December 31,  
     2014      2013      2012  
     (in thousands)  

Cost of revenue

   $ 338       $ 305       $ 150   

Research and development

     3,449         2,166         1,023   

Selling, general and administrative

     4,001         3,189         1,961   
  

 

 

    

 

 

    

 

 

 

Stock-based compensation expense

  7,788      5,660      3,134   

Income tax benefit (1)

  —        —        551   
  

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense, net of tax

$ 7,788    $ 5,660    $ 2,583   
  

 

 

    

 

 

    

 

 

 

 

(1) Tax benefits of $0.6 million were realized for 2012 due to the partial valuation allowance release on U.S. federal deferred tax assets. There were no tax benefits realized for 2014 and 2013 as a result of a partial valuation allowance on any additional U.S. stock compensation deferred tax assets in 2014 and 2013.

Valuation Assumptions

The Company estimates the fair value of each stock-based award on the date of grant using the BSM option pricing model. The assumptions used to value awards granted and employee stock purchases during 2014, 2013 and 2012 were as follows:

 

     Year Ended December 31,  
     2014     2013     2012  

Stock Option Plans:

      

Risk-free interest rate

     1.68-1.87     0.95-1.91     0.79-1.26

Expected volatility

     30.5-40.6     41-42     36-37

Expected term (in years)

     5.27-6.25        6.25       6.25   

Dividend yield

     —          —          —     
     Year Ended December 31,  
     2014     2013     2012  

ESPP:

      

Risk-free interest rate

     0.05-0.54     0.10-0.31     0.13-0.15

Expected volatility

     22-44     23-30     20-31

Expected term (in years)

     0.5-2.0        0.5-2.0        0.5   

Dividend yield

     —          —          —     

11. Capital stock

Common Stock

Under the Company’s certificate of incorporation, as amended and restated, the Company was authorized to issue 500,000,000 shares of common stock as of December 31, 2014 and 2013, respectively. The holder of each share of common stock is entitled to one vote. Common stockholders are entitled to dividends when and if

 

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declared by the Board of Directors, subject to the prior rights of the preferred stockholders. Since inception, the Company has not declared any cash dividends. In connection with the completion of the Company’s IPO on May 15, 2012, all of the Company’s previously outstanding shares of convertible preferred stock of 13,205,180 were converted into common stock.

As of December 31, 2014 and 2013, the Company had reserved shares of common stock for issuance as follows:

 

     December 31,  
     2014      2013  

Shares reserved for stock options and restricted stock units

     5,511,373         5,192,107   

Shares reserved for employee stock purchase plan

     70         156,136   

Preferred Stock

Under the Company’s certificate of incorporation, as amended and restated, the Company was authorized to issue 50,000,000 shares of preferred stock as of December 31, 2014 and 2013, respectively. No shares of preferred stock were issued and outstanding as of December 31, 2014 and 2013.

12. Income Taxes

The domestic and foreign components of income (loss) before income taxes were as follows:

 

     Year Ended December 31,  
     2014     2013      2012  

Domestic

   $ (41,892   $ 3,715      $ 23,815   

International

     (29,751     424         (9,370
  

 

 

   

 

 

    

 

 

 

Total

$ (71,643 $ 4,139   $ 14,445   
  

 

 

   

 

 

    

 

 

 

The provision (benefit) for income taxes consisted of the following:

 

     Year Ended December 31,  
     2014     2013     2012  

Current:

      

Federal

   $ (185   $ 1,377      $ 376   

State

     1        1        1   

Foreign

     681        811        482   
  

 

 

   

 

 

   

 

 

 
  497      2,189      859   
  

 

 

   

 

 

   

 

 

 

Deferred:

Federal

  1,550      —        (1,979

State

  —        —        —     

Foreign

  (79   (120   (32
  

 

 

   

 

 

   

 

 

 
  1,471      (120   (2,011
  

 

 

   

 

 

   

 

 

 

Income tax provision (benefit)

$ 1,968    $ 2,069    $ (1,152
  

 

 

   

 

 

   

 

 

 

 

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The reconciliation of the United States federal statutory income tax rate to the Company’s effective rate is as follows:

 

     Year Ended December 31,  
     2014     2013     2012  

Statutory federal tax rate

     34.0     34.0 %     35.0

Foreign tax rate differential

     (14.9     12.6        25.8   

Stock-based compensation

     (1.4     19.8        4.7   

Research and development credits

     2.0        (57.3     —     

Change in valuation allowance

     (11.3     14.3        (63.5

Valuation allowance release

     —          —          (13.7

Increase (decrease) in unrecognized tax benefits

     (0.7     23.0        2.6   

Goodwill

     (9.8     —          —     

Other

     (0.6     3.6        1.1   
  

 

 

   

 

 

   

 

 

 

Effective tax rate

  (2.7 )%    50.0 %   (8.0 )% 
  

 

 

   

 

 

   

 

 

 

The tax effects of temporary differences and carryforwards that give rise to significant portions of the deferred tax assets consisted of the following:

 

     December 31,  
     2014     2013  

Deferred tax assets:

    

Net operating loss carry forwards

   $ 15,093      $ 2,122   

Research and development credits

     10,849        6,378   

Stock Compensation

     1,668        1,064   

Accruals and reserves

     1,153        1,302   

Other

     517        553   
  

 

 

   

 

 

 

Total deferred tax assets

  29,280      11,419   

Valuation allowance

  (25,368   (7,586
  

 

 

   

 

 

 

Net deferred tax assets

  3,912      3,833   
  

 

 

   

 

 

 

Deferred tax liabilities

Intangibles

  (2,149   —     

Fixed assets

  (1,169   (1,698
  

 

 

   

 

 

 

Total deferred tax liabilities

  (3,318   (1,698
  

 

 

   

 

 

 

Total net deferred tax assets

$ 594    $ 2,135   
  

 

 

   

 

 

 

The Company regularly assesses the realizability of its deferred tax assets and establishes a valuation allowance if it is more-likely-than-not that some portion of the deferred tax assets will not be realized. The Company weighs both positive and negative evidence in determining the need for a valuation allowance, such as historical income (losses), recent earnings, forecasted income, customer concentration, pricing pressures, competition from larger companies with significantly greater resources and other risks inherent in the semiconductor industry. In the event the Company determines that it would not be able to realize all or part of its net deferred tax assets, an adjustment to the deferred tax assets would be charged to earnings in the period in which the Company makes such determination. Likewise, if the Company later determines that it is more–likely-than-not that the net deferred tax assets would be realized, it would reverse the applicable portion of the previously provided valuation allowance. The realization of deferred tax assets is primarily dependent on the Company generating sufficient U.S. and foreign taxable income in future fiscal years. The Company weighs both positive and negative evidence, from a quantitative and qualitative perspective, with more weight given to evidence that can be objectively verified. Under this standard, the Company’s downward trend of U.S. pretax income and current year U.S. pretax loss and three year cumulative loss in the U.S. considering the current and prior 2 years was considered significant and objectively verifiable negative evidence. In addition, the Company is

 

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Index to Financial Statements

subject to business uncertainties that make it difficult to forecast demand and production levels due to a lack of long term purchase commitments. Therefore, the Company is unable to reliably forecast taxable income in order to realize its U.S. deferred tax assets. Based on this significant negative evidence, the Company concluded that a valuation allowance should be established on all U.S. deferred tax assets as of December 31, 2014 with the exception of $0.3 million of deferred tax assets. The Company will continue to assess the realizability of the deferred tax assets in each of the applicable jurisdictions and maintain the valuation allowances until sufficient positive evidence exists to support a reversal. In the event that the Company determines that the deferred tax assets are realizable, an adjustment to the valuation allowance will be reflected in the tax provision in the period such determination is made.

In 2013, the Company released valuation allowance of $2.0 million, based on the amount of deferred tax assets that were more-likely-than-not to be realized based on available evidence, which was offset by the deferred expense of $2.0 million from the realization of the deferred tax assets as of December 31, 2012. The Company recognized a valuation allowance release of $2.0 million on its U.S. federal deferred tax assets for 2012.

As of December 31, 2014, the Company had total net deferred tax assets of $0.6 million, of which $0.3 million was included in other current assets and $0.3 million was included in other noncurrent assets on the consolidated balance sheet. The net deferred tax assets are presented gross of unrecognized tax benefits, which are not directly associated with the net operating losses (“NOLs”) and other tax attributes since they are generated in different years. These unrecognized tax benefits are presented separately as a liability and provide a source of taxable income for purposes of assessing the potential realization of the deferred tax assets.

Changes in the valuation allowance for deferred tax assets for 2014, 2013 and 2012 are as follows:

 

     December 31,  
     2014      2013      2012  

Beginning balance

   $ 7,586       $ 5,920       $ 16,628   

Charge (credited) to operations

     1,550         —           (1,980

Current year increase (decrease)

     16,232         1,666         (8,728
  

 

 

    

 

 

    

 

 

 

Ending balance

$ 25,368    $ 7,586    $ 5,920   
  

 

 

    

 

 

    

 

 

 

As of December 31, 2014, the Company had NOL carryforwards of approximately $43.7 million and $65.4 million available to reduce future taxable income, if any, for federal and California state income tax purposes, respectively. The cumulative amount related to stock option excess tax benefits included in NOL carryforwards for federal and California state is $10.5 million and $0.2 million, respectively. Upon realization of the excess tax benefit associated with stock options, the impact will be recorded in stockholders’ equity. The federal NOL carryforwards will begin to expire in 2023. The California state NOL carryforwards begin to expire in 2015. The Company’s ability to utilize its NOL carryforwards may be subject to an annual limitation due to the ownership percentage change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. As of December 31, 2014, the Company determined that ownership changes had occurred in the past that would result in limitations on the current and future utilization of its NOL carryforwards. However, the Company expects that the limitations were not significant enough to materially impact the future utilization of these tax attributes.

The Company also had federal and California state research and development (“R&D”) credit carryforwards of approximately $6.4 million and $7.1 million, respectively, as of December 31, 2014. The cumulative amount related to stock option excess tax benefits included in R&D credit carryforwards for federal is $0.3 million and none for California. Upon realization of the excess tax benefit associated with stock options, the impact will be recorded in stockholders’ equity. The federal R&D credits will expire starting in 2022 if not utilized. The California state R&D credits have no expiration date.

 

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Index to Financial Statements

Prior to January 1, 2012, the Company’s earnings were all U.S.-based. The Company commenced its first year of operations under its new international structure on January 1, 2012. The Company had $0.4 million of undistributed foreign earnings as of December 31, 2014 upon which no United States income taxes or foreign withholding taxes were provided. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both United States income taxes and withholding taxes payable to various foreign tax jurisdictions. As of December 31, 2014, the Company estimated that the amount of potential United States income tax related to a future distribution would result in an insignificant amount of United States and foreign taxes. However, determination of the amount of unrecognized deferred tax liability for temporary differences related to investments in these foreign subsidiaries that are essentially permanent in duration is not practicable, due to the complexities involved in the calculation. There is a significant amount of uncertainty of the tax impact of the remittance of these earnings due to the fact that dividends generally received from the Company’s foreign subsidiaries could result in additional foreign tax credits, which could ultimately reduce the U.S. tax cost of the dividend. In addition, the Company would have to analyze any additional U.S. and foreign withholding taxes and other indirect taxes that may also arise due to the distribution of these earnings. These reasons make it impracticable to accurately calculate the amount of deferred tax liabilities related to the undistributed earnings, particularly in light of the fact that the Company does not intend to distribute these unremitted earnings.

As of December 31, 2014, 2013, and 2012, the Company had $7.6 million, $5.9 million and $3.7 million, respectively, of unrecognized tax benefits. The total amount of unrecognized tax benefits, net of federal benefit for the deduction of such items as state taxes that, if recognized, would affect the Company’s effective tax rate was $6.3 million as of December 31, 2014. One or more of these unrecognized tax benefits could be subject to valuation allowance if and when recognized in a future period, which could impact the timing of any related effective tax rate benefit.

The following table summarizes the activity related to the Company’s gross unrecognized tax benefits:

 

     December 31,  
     2014      2013      2012  

Gross unrecognized tax benefits, beginning of the year

   $ 5,888       $ 3,674       $ 2,940   

Gross increases related to prior year positions

     117         178         —     

Gross increases related to current year positions

     1,564         2,036         734   
  

 

 

    

 

 

    

 

 

 

Gross unrecognized tax benefits, end of the year

$ 7,569    $ 5,888    $ 3,674   
  

 

 

    

 

 

    

 

 

 

The Company recognizes interest and/or penalties related to income tax matters within the provision for income taxes in the statements of operations. As of December 31, 2014, 2013 and 2012, the Company had no accrued interest or penalties due to its NOLs and tax credits available to offset any tax adjustments. The Company files income tax returns in the United States, including various state and certain foreign tax jurisdictions. The Company is subject to examination by U.S. federal and state tax authorities for all years after and including 2002 and is subject to examination by foreign tax authorities since the formation of its non-U.S. entities in 2011. The Company currently has no income tax examinations in progress nor has it had any income tax examinations since its inception.

The Company believes that an adequate tax provision has been made for any adjustments that may result from tax examinations should its previously filed tax returns be examined. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income tax in the period such resolution occurs. Although timing of the resolution and/or closure of audits is highly uncertain, the Company does not believe it is reasonably possible that its unrecognized tax benefits would materially change in the next 12 months.

 

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Index to Financial Statements

13. Restructuring

Due to the continuing softness in demand related to certain high-end smart phones, the Company encountered a significant downturn in demand from one of its major customers in the third and fourth quarters of 2014, which caused a disproportionate impact on the Company’s operating results and financial outlook in the short-term. In an effort to align overall spending with revenue, the Company announced and implemented a restructuring plan for a workforce reduction through involuntary terminations.

The Company recorded restructuring charges of approximately $1.4 million for 2014 for severance payments and extended health care benefits to terminated employees, of which $1.3 million was paid as of December 31, 2014. The remaining balance of $0.1 million is expected to be paid during the three months ending March 31, 2015.

Restructuring charges of $0.7 million each were allocated to research and development, and selling, general and administrative expenses in the Company’s consolidated statement of operations for 2014. The cost savings resulting from the restructuring are generally expected to be offset by increases in other expenses.

14. Segment and geographic information

The Company operates in one reportable segment related to the selling and marketing of voice and audio processors and licensing of processor IP for use in mobile devices. The Company has identified its president and chief executive officer as the Chief Operating Decision Maker (“CODM”) who manages the Company’s operations on a consolidated basis for purposes of allocating resources. When evaluating financial performance, the CODM reviews individual customer and product information, while other financial information is reviewed on a consolidated basis.

Substantially all of the Company’s revenue was generated from the sale of its products to CMs and OEMs whose primary manufacturing operations and distributors are in Asia. Since the Company’s OEMs market and sell their products worldwide, the Company’s revenue by geographic location is not necessarily indicative of the geographic distribution of mobile device sales, but rather of where the mobile devices are manufactured. The Company’s revenue is therefore based on the country or region in which its OEMs or their CMs issue their purchase orders to the Company.

Apple, one of the Company’s OEMs, transitioned the majority of its business with the Company from the purchase of the Company’s processors to licensing of the Company’s processor IP, which is generated in the jurisdiction where this OEM has its headquarters in the United States. The Company began to recognize licensing revenue on royalty payments in 2012. Licensing revenue accounted for 8%, 6% and 25% of total revenue for 2014, 2013 and 2012, respectively. Revenues by geographic regions are based upon the customers’ ship-to address or headquarters location. The following table set forth reportable revenues by geographic regions:

 

     Year Ended December 31,  
     2014      2013      2012  
     (in thousands)  

Revenue:

        

South Korea

   $ 85,008      $ 102,305       $ 70,740   

China

     17,662        46,702         33,006   

United States

     10,247        10,734         39,732   

Other

     423        390         427   
  

 

 

    

 

 

    

 

 

 

Total revenue

$ 113,340   $ 160,131    $ 143,905   
  

 

 

    

 

 

    

 

 

 

 

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Index to Financial Statements

The table below presents long-lived assets, consisting of property and equipment, by geographic regions:

 

     December 31,  
     2014      2013  
     (in thousands)  

Long-lived assets:

     

United States

   $ 8,913      $ 11,466   

China

     1,366        485   

Rest of the world

     1,355         1,582   
  

 

 

    

 

 

 

Total long-lived asets

$ 11,634   $ 13,533   
  

 

 

    

 

 

 

 

 

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Index to Financial Statements

EXHIBIT INDEX

 

Exhibit
number

  

Description

  

Incorporated
by reference
from form

  

Incorporated
by reference
from exhibit
number

    

Date filed

    3.1

   Amended and Restated Certificate of Incorporation of the Registrant.    S-1      3.1       1/13/2012

    3.2

   Amended and Restated Bylaws of the Registrant.    8-K      3.2       11/20/2013

    4.1

   Form of Common Stock Certificate of the Registrant.    S-1      4.1       5/8/2012

    4.3

   Amended and Restated Investors’ Rights Agreement dated February 3, 2010, by and among the Registrant and certain stockholders of the Registrant.    S-1      4.3       1/13/2012

    4.3.1

   Amendment to the Amended and Restated Investors’ Rights Agreement dated June 24, 2011, by and among the Registrant and certain stockholders of the Registrant.    S-1      4.3.1       1/13/2012

    4.3.2

   Amendment Number Two to the Amended and Restated Investors’ Rights Agreement dated April 17, 2012, by and among the Registrant and certain stockholders of the Registrant.    S-1      4.3.2       4/27/2012

  10.1

   Form of Indemnification Agreement for directors and executive officers.    S-1      10.1       1/13/2012

  10.2#

   2001 Stock Plan, as amended, and form of agreements used thereunder.    S-8      10.2       5/10/2012

  10.3#

   2011 Equity Incentive Plan, as amended, and form of agreements used thereunder.    S-8      10.3       5/10/2012

  10.4#

   Amended and Restated 2011 Equity Incentive Plan and form of agreements used thereunder.    10-K      10.4       3/14/2014

  10.5#

   2011 Employee Stock Purchase Plan and form of agreements used thereunder.    10-Q      10.5       11/14/2013

  10.10#

   Change of Control Severance Agreement by and between the Registrant and Peter B. Santos dated December 31, 2011.    S-1      10.10       1/13/2012

  10.11#

   Change of Control Severance Agreement by and between the Registrant and Kevin S. Palatnik dated January 9, 2012.    S-1      10.11       1/13/2012

  10.12#

   Form of Change of Control Severance Agreement by and between the Registrant and each of Edgar Auslander, Craig H. Factor, Stephanie Kaplan, Eitan Medina, and Robert H. Schoenfield.    S-1      10.12       1/13/2012

  10.14#

   2012 Executive Incentive Compensation Plan.    S-1      10.14       4/20/2012

  10.16

   Office Lease, dated as of June 5, 2012 and executed on June 5, 2012, by and between the Registrant and CarrAmerica National Avenue, L.L.C.    8-K      10.16       6/11/2012

  10.17#

   Offer letter to Eitan Medina, dated June 1, 2012.    10-Q      10.17       8/7/2012

  10.18#

   Offer letter to Craig Factor, dated September 5, 2012.    10-Q      10.18       11/6/2012


Table of Contents
Index to Financial Statements

Exhibit
number

  

Description

  

Incorporated
by reference
from form

  

Incorporated
by reference
from exhibit
number

    

Date filed

  10.20#

   Offer letter to Stephanie Kaplan, dated August 15, 2014.    10-Q      10.20       11/7/2014

  10.21#

   Offer letter to Edgar Auslander, dated May 1, 2014.         

  10.22#

   Sensor Platforms 2004 Stock Plan.    S-8      99.1       7/30/2014

  10.23+

   International Distributor Agreement by and between the Registrant and Comtech International (Hong Kong) Limited dated March 31, 2014.         

  21.1

   Subsidiaries.         

  23.1

   Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm.         

  24

   Power of Attorney (see the signature page to this Annual Report on Form 10-K).         

  31.1

   Certification of Principal Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.         

  31.2

   Certification of Principal Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.         

  32.1~

   Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. §1350.         

101.INS

   XBRL Instance Document         

101.SCH

   XBRL Taxonomy Schema Linkbase Document         

101.CAL

   XBRL Taxonomy Calculation Linkbase Document         

101.DEF

   XBRL Taxonomy Definition Linkbase Document         

101.LAB

   XBRL Taxonomy Labels Linkbase Document         

101.PRE

   XBRL Taxonomy Presentation Linkbase Document         

 

# Management contracts or compensation plans or arrangements in which directors or executive officers are eligible to participate.
+ Portions of the exhibit have been omitted pursuant to request for confidential treatment filed with the Securities and Exchange Commission.
~ The certifications furnished in Exhibit 32.1 hereto are deemed to accompany this Form 10-K and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filings under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates them by reference.

Exhibit 10.21

 

 

LOGO

May 1, 2014

Edgar Auslander

Dear Edgar,

I am pleased to offer you a position with Audience, Inc. (the “Company”) as our Vice President of Product Management and Marketing, reporting to me. If you decide to join us, your base salary will be $265,000 per year which will be paid semi-monthly in accordance with the Company’s normal payroll procedures. In addition, you will be eligible for a performance-based bonus target of $132,500 annually, prorated for the remainder of this calendar year. You will be subject to the terms and conditions of the Company’s 2014 Executive Bonus Plan. After 2014, your bonus target percentage will be set by the Company’s Compensation Committee on an annual basis.

Further, the Company will reimburse your eligible relocation expenses up to $10,000. Reimbursement for eligible expenses will not be taxable to you. Additionally, you will be paid a taxable signing bonus of $55,000 payable to you on the first payroll as an employee. If your employment with the Company is terminated by you for any reason or by the Company for cause prior to the completion of one year of service with Audience, your relocation reimbursement and signing bonus will be repayable by you to Audience in full.

The Company will provide you with the opportunity to participate in the standard benefit plans currently available to other similarly situated employees, subject to any eligibility requirements imposed by such plans. You will be entitled to accrue up to 15 days of paid vacation per calendar year, pro-rated for the remainder of this calendar year. Your rate of vacation accrual will increase at the rate of one vacation day per full year of employment. Vacation accrual is capped at 25 days. Vacation may not be taken before it is accrued. You should note that the Company may modify job titles, salaries and benefits from time to time as it deems necessary.

We will recommend to our Board of Directors or one of its committees after commencement of your employment that you receive a grant of options to purchase 75,000 shares of Audience’s Common Stock and a restricted stock unit for 30,000 of shares, and your grants will be subject to the approval of the Board or its committee. If a stock option, your grant will be priced in accordance with our equity incentive plan and our policies governing stock option grants. Both stock option and RSU grants will be subject to the terms of our equity incentive plan and policies.

With regards to stock options, 25% of the shares subject to the option shall vest 12 months after the date your vesting begins, the remaining shares shall vest monthly over the next 36 months in equal monthly amounts subject to your continuing employment with the Company.

 

LOGO


LOGO

 

With regards to your RSU, 25% of the shares subject to the option shall vest 12 months after the date your vesting begins, the remaining shares shall vest over three years in equal 6 month tranches subject to your continuing employment with the Company. We anticipate that you will enter into an irrevocable election relating to the RSU to permit the payment of required taxes upon vesting of the RSUs.

No right to any stock is earned or accrued until such time that vesting occurs, nor does a grant confer any right to continue vesting or employment.

The Company is excited about your joining and looks forward to a beneficial and productive relationship. Nevertheless, you should be aware that your employment with the Company is for no specified period and constitutes at-will employment. As a result, you are free to resign at any time, for any reason or for no reason. Similarly, the Company is free to conclude its employment relationship with you at any time, with or without cause, and with or without notice. We request that, in the event of resignation, you give the Company at least two weeks’ notice.

The Company reserves the right to conduct background investigations and/or reference checks on all of its potential employees. Your job offer, therefore, is contingent upon a clearance of such a background investigation and/or reference check, if any.

For purposes of federal immigration law, you will be required to provide to the Company documentary evidence of your identity and eligibility for employment in the United States. Such documentation must be provided to us within three (3) business days of your date of hire, or our employment relationship with you may be terminated.

As a result of the senior level nature of your role, you will be offered a Company standard Indemnification Agreement and will be expected to comply with all reporting and regulatory requirements related to the Company’s status as a publicly traded company. You acknowledge that upon your appointment as Vice President of Product Management and Marketing, you will become subject to Section 16 of the Securities Exchange Act of 1934, as amended. In addition, at the time you commence employment, you will be provided with severance and change of control benefits as delineated in the Company’s Change of Control and Severance Agreement, subject to your signed acceptance of the terms of the Agreement.

We also ask that, if you have not already done so, you disclose to the Company any and all agreements relating to your prior employment that may affect your eligibility to be employed by the Company or limit the manner in which you may be employed. It is the Company’s understanding that any such agreements will not prevent you from performing the duties of your position and you represent that such is the case. Moreover, you agree that, during the term of your employment with the Company, you will not engage in any other employment, occupation, consulting or other business activity directly related to the business in which the Company is now involved or becomes involved during the term of your employment, nor will you engage in any other activities that conflict with your obligations to the Company. Similarly,

 

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LOGO

 

you agree not to bring any third party confidential information to the Company, including that of any of your former employers, and that in performing your duties for the Company you will not in any way utilize any such information.

As a Company employee, you will be expected to abide by the Company’s rules and standards. Specifically, you will be required to sign an acknowledgment that you have read and that you understand the Company’s rules of conduct which are included in the Company Handbook.

As a condition of your employment, you are also required to sign and comply with an At-Will Employment, Confidential Information, Invention Assignment and Arbitration Agreement which requires, among other provisions, the assignment of patent rights to any invention made during your employment at the Company, and non-disclosure of Company proprietary information. In the event of any dispute or claim relating to or arising out of our employment relationship, you and the Company agree that (i) any and all disputes between you and the Company shall be fully and finally resolved by binding arbitration, (ii) you are waiving any and all rights to a jury trial but all court remedies will be available in arbitration, (iii) all disputes shall be resolved by a neutral arbitrator who shall issue a written opinion, (iv) the arbitration shall provide for adequate discovery, and (v) the Company shall pay all but the first $125 of the arbitration fees. Please note that we must receive your signed Agreement before your first day of employment.

To accept the Company’s offer, please sign and date this letter in the space provided below. A duplicate original is enclosed for your records. This letter, along with any agreements relating to proprietary rights between you and the Company, set forth the terms of your employment with the Company and supersede any prior representations or agreements including, but not limited to, any representations made during your recruitment, interviews or pre-employment negotiations, whether written or oral. This letter, including, but not limited to, its at-will employment provision, may not be modified or amended except by a written agreement signed by an Executive of the Company and you. This offer of employment will terminate if it is not accepted, signed and returned by Friday, May 2, 2014.

We look forward to your favorable reply and to working with you at Audience, Inc.

 

Sincerely,
/s/ Peter Santos
Peter Santos
President and CEO

 

LOGO


LOGO

 

 

Agreed to and accepted:
Signature:  

/s/ EDGAR AUSLANDER

Printed Name:  

EDGAR AUSLANDER

Date Signed:  

May 2, 2014

Anticipated Start Date:  

May 12, 2014

Enclosures to be mailed:

Duplicate Original Letter

At-Will Employment, Confidential Information, Invention Assignment and Arbitration Agreement

Indemnification Agreement

Change of Control and Severance Agreement

 

LOGO

Exhibit 10.23

AUDIENCE

INTERNATIONAL DISTRIBUTOR AGREEMENT

This International Distributor Agreement (“Agreement”) is entered into as of March 31, 2014 (“Effective Date”), between AUDIENCE SINGAPORE PTE. LTD., a Singapore corporation with principal offices at 2 Changi Business Park Avenue 1, Level 2, Suite 31, Singapore 486015 (“Audience”), and COMTECH INTERNATIONAL (HONG KONG) LIMITED, a Hong Kong corporation, with offices at Skyworth Building, 9th Floor, Science Park, Nanshan District, Shenzen, China (“Distributor”).

In consideration of the mutual promises contained herein, the parties agree as follows:

1. DEFINITIONS

(a) “Products” shall mean those products listed in Exhibit A attached hereto.

(b) “Territory” shall mean that geographic area identified in Exhibit B attached hereto.

2. APPOINTMENT

(a) Appointment. Subject to the terms and conditions set forth herein, Audience hereby appoints Distributor as Audience’s non-exclusive distributor for the Products to those accounts specifically named in Exhibit A, in the Territory, and Distributor hereby accepts such appointment. Accordingly, subject to the terms and conditions herein, Audience hereby grants Distributor, and Distributor accepts, under Audience’s intellectual property rights, a non-transferable, non-sublicensable, non-exclusive license, during the term of this Agreement, to offer for sale and sell the Products directly to those accounts specifically named in Exhibit A whose principal place of business is within the Territory.

(b) Limitation on Distributor’s Rights to the Products. Distributor shall have no right (i) to copy, modify, disassemble, reverse engineer, or remanufacture any Product or part thereof; (ii) modify, remove or obstruct any proprietary rights notice contained within the Product; or (iii) without Audience’s prior written approval, distribute the Product to third parties for remarketing, including without limitation to sub-distributors or resellers.

(c) Territorial Responsibility.

(a) Distributor shall pursue diligent sales policies and procedures to realize the maximum sales potential for the Products in the Territory. Distributor’s promotion shall include but not be limited to preparing promotional materials in appropriate languages for the Territory, advertising the Products in trade publications within the Territory, participating in appropriate trade shows, and directly soliciting orders from customers for the Products. Distributor shall provide Audience with detailed quarterly reports specifying Distributor’s activities under this Agreement.

(b) Distributor shall neither advertise the Products nor solicit orders outside the Territory, or to accounts other than those specifically identified in Exhibit A, without the prior written consent of Audience. If Distributor receives an inquiry from a potential customer outside the Territory, Distributor shall direct such customer to Audience and shall promptly forward such inquiry to Audience.

 

**** Certain information has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.


(d) Reservation of Rights. Audience reserves the right to market and distribute its products, including the Products, directly or through third parties anywhere in the world, including the Territory. Audience reserves the right, from time to time, in its sole discretion and without liability to Distributor or any other third party to discontinue the manufacture or sale of, or otherwise render or treat as obsolete, change, add to, or delete Products. Audience will use commercially reasonable efforts to notify Distributor at least [****] in advance of any Product discontinuance and will allow Distributor a last-time buy opportunity in multiple wafer equivalent quantities, subject to Audience’s reasonable lot requirements. Audience will also provide Distributor written notice of any additions to its Product line.

(e) Conflict of Interest. Distributor warrants to Audience that it does not currently represent or promote any lines or products that compete with the Products or any competitors of Audiences. During the term of this Agreement, Distributor shall not, without Audience’s prior written consent, represent, promote or otherwise try to sell anywhere in the world, any lines or products that, in Audience’s judgment, compete with the Products or otherwise create a conflict of interest in handling Audience’s confidential information, including without limitation through distribution of products on behalf of a competitor of Audience. Immediately prior to the execution of this Agreement, Distributor shall provide Audience with a list of the companies and products that it currently represents and shall notify Audience in writing of any new companies and products at least thirty (30) days prior to undertaking the promotion of any new companies or products.

(f) Independent Contractors. The relationship of Audience and Distributor established by this Agreement is that of independent contractors, and nothing contained in this Agreement shall be construed to (i) give either party the power to direct and control the day-to-day activities of the other, (ii) constitute the parties as partners, joint venturers, co-owners or otherwise as participants in a joint or common undertaking, or (iii) allow Distributor to create or assume any obligation on behalf of Audience for any purpose whatsoever. All financial obligations associated with Distributor’s business are the sole responsibility of Distributor. All sales and other agreements between Distributor and its customers are Distributor’s exclusive responsibility and shall have no effect on Distributor’s obligations under this Agreement.

3. TERMS OF PURCHASE

(a) Terms and Conditions. All purchases of Products by Distributor from Audience pursuant to this Agreement shall be governed exclusively by the terms and conditions of this Agreement. Nothing contained in Distributor’s purchase orders shall in any way modify or add additional terms. Distributor shall not provide the Products to its customers in a manner not authorized by Audience or in a manner inconsistent with this Agreement. For example, Distributor will provide to its customers indemnification, representations and warranties, disclaimers and limits on liability identical to those in this Agreement and will require, both contractually and in practice, that its customers respect Audience’s intellectual property under the same terms as set forth in Sections 10 and 11 hereof.

(b) Order and Acceptance. All orders for Products submitted by Distributor shall be initiated by written purchase order sent to Audience and requesting a delivery date during the term of this Agreement. Distributor shall only place an order for Products after Distributor receives a written purchase order from its end-customer. No order shall be binding upon Audience until accepted by Audience in writing, and Audience shall have no liability to Distributor with respect to purchase orders that are not accepted. Audience shall use its reasonable efforts to notify Distributor of the acceptance or rejection of an order and of the assigned delivery date for accepted orders within ten (10) days after receipt of the purchase order. No

 

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partial shipment of an order shall constitute the acceptance of the entire order, absent the written acceptance of such entire order. Unless Distributor clearly advises Audience to the contrary in writing, Audience may make partial shipments, to be separately invoiced and paid for when due. Delay in delivery of any installment will not relieve Distributor of its obligation to accept the remaining deliveries. Distributor shall ship the Products only to the end-customer listed in the applicable purchase order.

(c) Cancellation and Reschedule of Order. Distributor may cancel an order or request a change in the shipment date for orders not yet accepted by Audience. After acceptance by Audience, purchase orders may be deferred by the Distributor, at no additional cost, as follows: (a) [****]: no reschedules/no cancellations; (b) [****]: reschedules allowed, no cancellations allowed; and (c) [****]: reschedules and cancellations allowed. Audience will also consider Distributor’s reasonable requests to reschedule orders outside of the foregoing timeframes; provided that Distributor will be responsible for reimbursing all reasonable costs incurred by the Audience as a result of accommodating Distributor’s request. Notwithstanding the foregoing, Distributor may not change or cancel any orders for non-standard or custom hardware (IC) Products after the acceptance of such orders by Audience.

(d) Shipping. All Products delivered pursuant to this Agreement shall be packed for air freight shipment in Audience’s standard shipping cartons, and shall be delivered to Distributor or its carrier F.O.B. (as defined in Section 2319 of the California Uniform Commercial Code) Audience’s plant, at which time title to such Products and risk of loss shall pass to Distributor. Unless otherwise instructed in writing by Distributor, Audience shall select the carrier. All freight, insurance, and other shipping expenses, as well as any special packing expense, shall be paid by Distributor. Distributor shall also bear all applicable taxes, duties, and similar charges that may be assessed against the Products after delivery to the carrier at Audience’s plant.

(e) Allocation. Audience will use reasonable efforts to meet Distributor’s requested delivery schedules for Products, but Audience reserves the right to refuse, cancel or delay shipment to Distributor if (1) Distributor’s credit is impaired, (2) Distributor is delinquent in payments or fails to meet other credit or financial requirements established by Audience, or (3) Distributor has failed to perform its obligations under this Agreement. Should orders for Products exceed Audience’s available inventory, Audience will allocate its available inventory and make deliveries on a basis Audience deems equitable, in its sole discretion, and without liability to Distributor on account of the method of allocation chosen or its implementation. In any event, Audience will not be liable for any damages, direct, consequential, special or otherwise, to Distributor or to any other person for failure to deliver or for any delay or error in delivery of the Products for any reason whatsoever.

(f) Prices.

(a) List price is for each Product are set forth in Exhibit A attached hereto (“List Price”). Distributor shall place purchase orders to Audience at a price quoted or approved by Audience (“Purchase Price”). The difference between Distributor’s Purchase Price and Distributor’s selling price to its customers (“Commission”) shall be Distributor’s sole remuneration for the sale of Products. The Commission is anticipated to approximate those percentage rates set forth in Exhibit A attached hereto, but will vary depending upon, among other factors, the costs and market conditions that affect pricing. For the avoidance of doubt, the Commission provided to Distributor shall not apply to: (1) any accounts other than those specifically named in Exhibit A, (2) any repair fees and charges, (3) freight, insurance and special packaging charges, and (4) sales, excise or similar taxes and customs duties.

 

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(b) Audience has the right at any time to revise the List Price with thirty (30) days’ advance written notice to Distributor. Such revisions shall apply to all orders received after the effective date of revision. Price changes shall not affect unfulfilled purchase orders accepted by Audience prior to the effective date of the price increase.

(c) Notwithstanding the foregoing, from time to time, to obtain specific orders, prices for Products to an end-customer may have to be reduced below List Price. In such cases, Audience shall have no obligation to provide prior notice of such price decrease to Distributor, and Distributor agrees that its Commission will be applied to such reduced price rather than the List Price.

(g) Taxes. Distributor’s Purchase Price does not include any federal, state or local sales, use, value added or other taxes, customs duties, or similar tariffs and fees that may be applicable to the Products. When Audience has the legal obligation to collect such taxes, the appropriate amount shall be added to Distributor’s invoice and paid by Distributor, unless Distributor provides Audience with a valid tax exemption certificate authorized by the appropriate taxing authority. Distributor represents and warrants to Audience that all Products acquired hereunder are for redistribution in the ordinary course of Distributor’s business. Distributor shall indemnify Audience for any claims, costs and expenses incurred by Audience in connection with the payment or collection of all such duties and taxes, including any related penalties.

(h) Payment; No Right to Offset. Full payment of Distributor’s Purchase Price for the Products as well as any freight, taxes or other applicable costs initially paid by Audience but to be borne by Distributor shall be made by Distributor to Audience upon the earlier of, thirty (30) days from shipment or the applicable invoice date. Payment shall be in U.S. dollars and shall be made by certified check or wire transfer to an account designated by Audience. All exchange, interest, banking, collection, and other charges shall be at Distributor’s expense. Any invoiced amount not paid when due shall be subject to a service charge of one and one-half percent (1.5%) per month. Distributor shall pay all of Audience’s costs and expenses (including reasonable attorneys’ fees) to collect any unpaid amounts or otherwise enforce and preserve Audience’s rights under this Section 3(h). Transfer of title for each Product shipped to Distributor shall be conditioned upon full payment of the Purchase Price and other costs and expenses by Distributor. Until such payment in full, Audience shall retain a purchase money security interest in the applicable Products. Distributor shall have no, and hereby waives, any right to offset or withhold from Audience’s invoices any amounts that Distributor may claim is owed to it by Audience.

(i) Product return: In the event of a project End of Life (EOL) by a specific customer where the Products are no longer required by such specific customers, as verified by Distributor, and after Distributor using diligent good faith efforts is unable to resell the relevant Products, Distributor shall have the right to return to Audience within [****] an inventory of such Products ordered for the specific customer up to a maximum of [****] of the Products shipped to such customer in the immediately preceding quarter. Products may only be returned if new, in their original packaging, and not damaged. Audience shall, at its option, either issue a credit equal to the value of the returned Products, or offset any amounts otherwise owed by Distributor to Audience.

4. SERVICE AND SUPPORT. Except as expressly authorized in writing by Audience, Distributor shall not offer or agree to provide any training, support or other services to any end-customers in connection with the Products.

 

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5. ADDITIONAL OBLIGATIONS OF DISTRIBUTOR

(a) Forecasts. Distributor shall provide Audience with [****] order forecasts, or at such other frequency as Audience may request from time to time.

(b) Representations. Distributor shall not make any false or misleading representations to customers or others regarding Audience or the Products. Distributor shall not make any representations, warranties or guarantees with respect to the specifications, features or capabilities of the Products that are not consistent with Audience’s documentation accompanying the Products or Audience’s literature describing the Products, including the limited warranty and disclaimers.

(c) Financial Condition. Distributor will maintain and employ in connection with Distributor’s business under this Agreement such working capital and net worth as may be required, in Audience’s reasonable opinion, to enable Distributor to carry out and perform all of Distributor’s obligations and responsibilities under this Agreement. Distributor shall devote sufficient financial and personnel resources including technically qualified sales and service engineers to fulfill its responsibilities under this Agreement. From time to time, on reasonable notice by Audience, Distributor will furnish such financial reports and other financial data as Audience may reasonably request to determine adequacy of Distributor’s financial condition.

(d) Import and Export Requirements. Distributor shall, at its own expense, pay all import and export licenses and permits, pay customs charges and duty fees, and take all other actions required to accomplish the export and import of the Products purchased by Distributor. Distributor understands that Audience is subject to regulation by agencies of the U.S. government, including the U.S. Department of Commerce, which prohibit export or diversion of certain technical products to certain countries. Distributor warrants that it will comply in all respects with the export and re-export restrictions set forth in the export license for every Product shipped to Distributor.

(e) Records. All records prepared by or for Distributor in connection with this Agreement will be preserved for a minimum of seven (7) years, or such longer period as Audience may specify in writing. Such obligation to maintain, make available and preserve records will survive the termination or expiration of this Agreement. Annually, or as necessary, and on ten (10) days’ advance notice, Audience will have the right, by itself and through representatives, to examine and to audit (i) all records and accounts containing transaction data and marketing programs for Products; (ii) Distributor’s systems, processes and internal controls; and (iii) Distributor’s inventory, and inventory tracking and management systems. Should such an audit lead to the conclusion that Distributor was overpaid by Audience, Distributor shall promptly reimburse Audience and, should the audit reveal errors in Distributor’s calculations of more than 5%, Distributor shall promptly reimburse Audience for the cost of the audit.

(f) Notices. Distributor will: (i) notify Audience in writing of any claim or proceeding involving the Products within two (2) days after Distributor learns of such claim or proceeding; (ii) report promptly to Audience all claimed or suspected Product defects; and (iii) notify Audience in writing not more than ten (10) days after any change in the executive management of Distributor or any transfer of more than twenty-five percent (25%) of Distributor’s voting control or all or substantially all of its assets.

(g) Market Information. Subject to the requirements of applicable law, Distributor will advise Audience promptly concerning any market information that may come to Distributor’s attention respecting Audience, the Products, Audience’s market position, or the continued competitiveness of the Products in the Territory, including charges, complaints or claims by customers or others about Audience or the Products; provided, however, that Distributor will not be obligated to disclose any information in violation of any confidentiality obligation to a third party.

 

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(h) Sales Contacts. Distributor shall assign primary and back-up sales contacts as named below. Distributor shall give Audience a 30-days’ prior written notice of any change in such assignment.

Primary Sales Contact:

Name:

Phone: (direct)

Email:

Back up Sales Contact:

Name:

Phone: (direct)

Email:

(i) Support Contacts. Distributor shall assign primary and back-up field application support resource as identified below. Distributor shall give Audience a 30-days’ prior written notice of any change in such assignment. If Distributor and Audience agree in writing that support for the Territory requires more than typical application support resource, a fair and reasonable compensation shall be agreed to in writing for that support.

Primary Applications Contact:

Name:

Phone: (direct)

Email:

Back-up Applications Contact:

Name:

Phone: (direct)

Email:

(j) Facilitate Customer Discussions. Distributor shall facilitate negotiations between Audience and end-customer with regard to the scope of work and/or delivery of Products directly to such end-customers, track execution against these commitments, and help Audience receive acknowledgement directly for completion of work and/or acceptability of Product from end-customers.

6. ADDITIONAL OBLIGATIONS OF AUDIENCE

Audience shall provide Distributor, at no cost, with available marketing and technical literature concerning the Products. Audience shall promptly respond to all inquiries from Distributor concerning matters pertaining to this Agreement.

7. TERM AND TERMINATION

(a) Term. This Agreement shall commence on the Effective Date and shall continue in force until terminated pursuant to this Section 7.

 

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(b) Termination for Convenience. Audience may terminate this Agreement for any reason by giving Distributor written notice thirty (30) days in advance.

(c) Termination for Cause.

(a) If either party materially breaches this Agreement, then the other party may terminate this Agreement on 30-days’ written notice to the defaulting party, unless such breach is cured within such notice period. If the breach is not cured within such notice period, then this Agreement shall automatically terminate at the end of that period.

(b) This Agreement shall terminate immediately, without notice, (A) upon breach by Distributor of Section 2(e) or Section 10(c), (B) upon the institution by or against either party of insolvency, receivership or bankruptcy proceedings or any other proceedings for the settlement of such party’s debts, (C) upon either party’s making an assignment for the benefit of creditors, or (D) upon either party’s dissolution or ceasing to do business in the ordinary course.

(d) Termination upon Assignment. Audience shall have the right to terminate this Agreement immediately, without notice, in the event Distributor assigns or seeks to assign all or substantially all of its business or assets, by operation of law or otherwise, including in connection with a merger, stock or asset sale, or a similar transaction.

(e) Fulfillment of Orders upon Termination. Upon termination of this Agreement other than for Distributor’s breach pursuant to Section 7(c)(b) or Section 7(d), Audience shall continue to fulfill, subject to the terms of Section 3 above, all orders accepted by Audience prior to the effective date of termination. In the event of termination pursuant to Section 7(c)(b) or Section 7(d), Audience shall have no obligation to fulfill any pending orders, even if accepted by Audience prior to the date giving rise to the applicable termination.

(f) Return of Materials. Within thirty (30) days after the effective date of termination of this Agreement, Distributor shall return to Audience all unused literature, price and delivery sheets and all other tangible instances of Audience’s confidential information and other materials related to Audience or the Products in its possession, and shall not use or retain copies thereof. Effective upon the effective date of termination of this Agreement, Distributor shall cease to use all trademarks, marks, and trade names of Audience.

(g) Survival. The provisions of Sections 2(b), 2(e), 2(f), 3(g), 5(b), 5(e), 7(e)-7(g), 8, 10 and 12 shall survive the termination of this Agreement for any reason.

8. DISCLAIMER; LIMITATION ON LIABILITY

EXCEPT AS EXPRESSLY SET FORTH IN AUDIENCE’S LIMITED WARRANTY APPLICABLE TO PRODUCTS, AUDIENCE MAKES NO OTHER WARRANTIES OR REPRESENTATIONS WITH REGARD PRODUCTS OR SERVICE TO DISTRIBUTOR OR TO ANY OTHER PARTY. AUDIENCE RESERVES THE RIGHT TO CHANGE THE WARRANTY AND SERVICE POLICY SET FORTH IN SUCH LIMITED WARRANTY, OR OTHERWISE, AT ANY TIME, WITHOUT FURTHER NOTICE AND WITHOUT LIABILITY TO DISTRIBUTOR OR TO ANY OTHER PARTY. TO THE EXTENT PERMITTED BY APPLICABLE LAW, AUDIENCE HEREBY DISCLAIMS ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, IMPLIED WARRANTIES OF MERCHANTABILITY, NON-INFRINGEMENT AND FITNESS FOR ANY PARTICULAR PURPOSE.

 

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AUDIENCE’S LIABILITY ARISING OUT OF THIS AGREEMENT SHALL BE LIMITED TO [****] GIVING RISE TO THE APPLICABLE CLAIM. IN NO EVENT SHALL AUDIENCE BE LIABLE FOR ANY COST OF SUBSTITUTE GOODS OR SERVICES OR FOR CONSEQUENTIAL, SPECIAL, INCIDENTAL, OR INDIRECT DAMAGES, HOWEVER CAUSED AND BASED ON ANY THEORY OF LIABILITY, WHETHER FOR BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE) OR OTHERWISE, ARISING OUT OF OR RELATED TO THIS AGREEMENT, INCLUDING BUT NOT LIMITED TO LOST PROFITS, EVEN IF AUDIENCE HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. THESE LIMITATIONS SHALL APPLY NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDIES. THE PARTIES AGREE THAT THE FOREGOING LIMITATIONS REPRESENT A REASONABLE ALLOCATION OF RISK UNDER THIS AGREEMENT.

 

9. INDEMNIFICATION

(a) By Audience. Distributor agrees that Audience has the right to defend, or at its option to settle, and Audience agrees, at its own expense, to defend or at its option to settle, any claim, suit or proceeding (collectively, “Action”) brought against Distributor alleging that the use of the Products by Distributor infringes or misappropriates any U.S. patent, copyright or trade secret. Audience will have sole control of any such Action or settlement negotiations, and Audience agrees to pay, subject to the limitations set forth in Sections 8 and 9(c), any final judgment entered against Distributor as a result of such infringement in any such Action defended by Audience. Distributor agrees that Audience, at its sole option, will be relieved of the foregoing obligations, unless Distributor notifies Audience promptly in writing of such Action and gives Audience authority to proceed as contemplated herein, and, at Audience’s expense, gives Audience proper and full information and assistance to settle and/or defend any such Action.

(b) Enjoinment of Products. If the Products, or any part thereof, are, or in the opinion of Audience may become, the subject of any Action, or if a judicial or other governmental authority enjoins the use or distribution of Products as a result of an Action defended by Audience, then Audience may, at its option and expense: (a) procure for Distributor the right to distribute or use, as appropriate, the Products; (b) replace the Products with other suitable Products; (c) suitably modify the Products; or (d) if the foregoing alternatives cannot be accomplished on a commercially reasonable basis, as determined in Audience’s sole discretion, require Distributor to return such Products and refund the aggregate payments paid therefor by Distributor, less a reasonable sum for use and damage.

(c) Exceptions to Audience’s Indemnification Obligations. Notwithstanding the provisions of Section 9(b) above, Audience assumes no liability for the following:

(a) any infringement claims (including without limitation combination or process patents) arising out of the combination of a Product or use with other hardware, software or other items not provided by Audience to the extent such infringement would not have occurred absent such combination or use;

(b) the modification of the Products, or any part thereof, unless such modification was made by Audience;

 

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(c) any infringement claims arising out of Audience’s compliance with Distributor’s specifications or designs; or

(d) any claim, suit or proceeding related to patents that are necessarily infringed by the manufacture, use or sale of Products that conform to any technical standard adopted by an standards organization or technology consortium such as the International Organization for Standardization, the International Electrotechnical Commission, and the CCITT/ITU.

(d) By Distributor. Distributor will indemnify and hold harmless Audience from and against any and all third party claims, liability, damages, costs or expenses (including attorneys’ fees) (i) arising out of the distribution of Products after Audience has required Distributor to return such Products pursuant to Section 9(b), or (ii) asserted under Section 9(c). Audience will not be liable for any costs or expenses incurred without its prior written authorization.

(e) EXCLUSIVE REMEDY. THE FOREGOING PROVISIONS OF THIS SECTION 9 STATE THE ENTIRE LIABILITY AND OBLIGATION OF AUDIENCE AND THE EXCLUSIVE REMEDY OF DISTRIBUTOR AND ITS CUSTOMERS WITH RESPECT TO ANY ALLEGED INFRINGEMENT BY THE PRODUCTS OF THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES.

 

10. OWNERSHIP AND CONFIDENTIALITY

(a) Ownership. As between Audience and Distributor, Audience owns exclusively all rights, title and interest in and to all intellectual property rights embodied in or related to the Products and any other materials or information provided or made available by Audience to Distributor hereunder or that Distributor otherwise obtained or had access to in connection with this Agreement. Distributor’s rights are limited solely to the specific distribution rights expressly granted to it by Audience during the term of this Agreement.

(b) Sale Conveys no Right to Manufacture or Copy. Without limiting the generality of anything set forth in Section 10(a) above, the Products are offered for sale and are sold by Audience subject in every case to the condition that such sale does not convey any license, expressly or by implication, to manufacture, duplicate or otherwise copy or reproduce any of the Products. Distributor shall take appropriate steps with its customers, as Audience may request, to inform them of and ensure compliance with the restrictions contained in this Section 10(b).

(c) Confidentiality. Distributor acknowledges that by reason of its relationship to Audience hereunder, it will have access to certain information and materials concerning Audience’s business, plans, customers, technology, and products, including the Products, that are confidential and of substantial value to Audience, which value would be impaired if such information were used or disclosed to third parties. Distributor agrees that it will not use in any way for its own account or the account of any third party, nor disclose to any third party, any such confidential information of Audience. Distributor shall take every reasonable precaution to protect the confidentiality of such information, shall implement reasonable procedures to prohibit the disclosure, unauthorized duplication, misuse or removal of Audience’s confidential information, and shall disclose Audience’s confidential information only to those of its employees who are, by written agreement, bound by the terms of this Agreement to the same extent as Distributor, with a need for such disclosure for the purposes of this Agreement. Without limiting the foregoing, Distributor shall use at least the same procedures and degree of care which it uses to prevent the disclosure and misuse of its own

 

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confidential information of like importance to prevent the disclosure and misuse of Audience’s confidential information, but in no event less than reasonable care. Upon request by Distributor, Audience shall advise whether or not it considers any particular information or materials to be confidential. Distributor shall not publish any technical description of the Products beyond the description published by Audience (except to translate that description into appropriate languages for the Territory). In the event of termination of this Agreement, there shall be no use or disclosure by Distributor of any confidential information of Audience, and Distributor shall not manufacture or have manufactured any devices, components or assemblies utilizing any of Audience’s confidential information. Unauthorized use by Distributor of Audience’s confidential information will diminish the value of such information. Therefore, if Distributor breaches any of its obligations with respect to confidentiality or the use of such confidential information, Audience shall be entitled to seek equitable relief to protect its interest herein, including injunctive relief, as well as money damages, and Distributor shall indemnify and hold Audience harmless against all losses, costs, expenses and liabilities arising as a result of any breach of this Section 10(c).

11. TRADEMARKS

During the term of this Agreement, Distributor shall have the right to indicate to the public that it is an authorized distributor of Audience’s Products and to advertise (within the Territory) such Products under the trademarks, marks, and trade names that Audience may adopt from time to time (“Audience’s Trademarks”). Distributor shall not alter or remove any Audience’s Trademark applied to the Products by Audience. Except as set forth in this Section 11, nothing contained in this Agreement shall grant to Distributor any right, title or interest in Audience’s Trademarks, and all goodwill associated with Distributor’s use of Audience’s Trademarks hereunder shall inure solely to Audience. At no time during or after the term of this Agreement shall Distributor challenge or assist others to challenge Audience’s Trademarks or the registration thereof or attempt to register any trademarks, marks or trade names confusingly similar to those of Audience. All representations of Audience’s Trademarks that Distributor intends to use shall first be submitted to Audience for approval of design, color, and other details or shall be exact copies of those used by Audience.

12. GENERAL PROVISIONS

(a) Governing Law. This Agreement shall be governed by and construed under the laws of Singapore. The parties agree that any litigation shall be subject to the exclusive jurisdiction and venue of the courts located in Singapore. Distributor hereby expressly consents to (i) the personal jurisdiction of the federal and state courts within Singapore, (ii) service of process being effected upon it by registered mail sent to the address set forth at the beginning of this Agreement, and (iii) the uncontested enforcement of a final judgment from such court in any other jurisdiction wherein Distributor or any of its assets are present.

(b) Entire Agreement. This Agreement sets forth the entire agreement and understanding of the parties relating to the subject matter herein and merges all prior discussions between them. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, shall be effective unless in writing signed by the party to be charged.

(c) Severability. If for any reason a court of competent jurisdiction finds any provision of this Agreement, or portion thereof, to be unenforceable, that provision or portion shall be enforced to the maximum extent permissible so as to effect the intent of the parties, and the remainder of this Agreement shall continue in full force and effect.

 

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(d) Notices. Any notice required or permitted by this Agreement shall be in writing and shall be sent by prepaid registered or certified mail, return receipt requested, addressed to the other party at the address shown at the beginning of this Agreement or at such other address for which such party gives notice hereunder. Such notice shall be deemed to have been given seven (7) days after deposit in the mail.

(e) No Assignment. A mutually agreed consideration for Audience’s entering into this Agreement is the reputation, business standing, and goodwill already honored and enjoyed by Distributor under its present ownership. Accordingly, Distributor agrees that its rights and obligations under this Agreement may not be transferred or assigned, directly or indirectly, by operation of law or otherwise, including without limitation in connection with a merger, sale of all or substantially all assets or business of Distributor, or a similar transaction, without the prior written consent of Audience. Audience may transfer this Agreement, including without limitation in connection with a merger, sale of all or substantially all assets or business of Audience, without the prior written consent of Distributor. Subject to the foregoing, this Agreement shall be binding upon and inure to the benefit of the parties hereto and their successors and permitted assigns.

(f) Legal Expenses. The prevailing party in any legal action brought by one party against the other and arising out of this Agreement shall be entitled, in addition to any other rights and remedies it may have, to reimbursement for its expenses, including court costs and reasonable attorneys’ fees.

(g) Representation by Counsel. The parties acknowledge that they have been represented by counsel in connection with this Agreement and the transactions contemplated by this Agreement. Accordingly, any rule of law or any legal decision that would require interpretation of any claimed ambiguities in this Agreement against the party that drafted it has no application and is expressly waived. The provisions of this Agreement shall be interpreted in a reasonable manner to effect the intent of the parties.

(h) Amendments. No alteration, amendment or modification of any provision of this Agreement shall be binding on the parties unless made in writing and signed by duly authorized representatives of both parties.

(i) Waivers. No delay or omission by either party to exercise any right or power it has under this Agreement shall impair or be construed as a waiver of such right or power. A waiver by any party of any breach or covenant shall not be construed to be a waiver of any succeeding breach or any other covenant. All waivers must be in writing and signed by both parties.

(j) Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument.

The parties have executed this Agreement as of the date first above written.

 

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AUDIENCE SINGAPORE PTE. LTD. COMTECH INTERNATIONAL (HONG KONG) LIMITED
By

/s/ Eve Tan

By

/s/ Henry Li

Print Name

Eve Tan

Print Name

Henry Li

Title

Director

Title

General Manager

 

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EXHIBIT A

COMMISSION BY ACCOUNT; PRODUCT; LIST PRICE

Commission:

    On [****]:

 

  ¡    [****] for logistics on current projects [****]

 

  ¡    [****] for logistics on new projects [****]

 

    On [****] and [****]:
  ¡    [****] for logistics

 

  ¡    Up to [****] for design activity

 

Product

List Price

[****]

[****]

[****]

 

**** Certain information has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.


EXHIBIT B

TERRITORY

[****]

 

**** Certain information has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

Exhibit 21.1

Subsidiaries of Audience, Inc.

 

Entity Name Jurisdiction/State of Incorporation
Audience China Ltd. Co. China
Audience Communications Systems India Private Limited India
Audience Communications Systems Singapore Pte. Ltd. Singapore
Audience International, Inc. Cayman Islands
Audience Korea Yuhan Hoesa South Korea
Audience Manufacturing Services, Inc. Cayman Islands
Audience Sales and Support, Inc. Cayman Islands
Audience Singapore Pte. Ltd. Singapore
Sensor Platforms, Inc. Delaware

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-197717, No. 333-194931, No. 333-181302) of Audience, Inc. of our report dated March 9, 2015 relating to the financial statements, which appears in this Form 10-K.

/s/PricewaterhouseCoopers LLP

San Jose, California

March 9, 2015

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

Certification of Principal Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the

Securities Exchange Act of 1934, as amended.

I, Peter B. Santos, certify that:

1. I have reviewed this Annual Report on Form 10-K of Audience, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 9, 2015

 

/s/ Peter B. Santos

Peter B. Santos
President, Chief Executive Officer and Director (Principal Executive Officer)

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

Certification of Principal Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the

Securities Exchange Act of 1934, as amended.

I, Kevin S. Palatnik, certify that:

1. I have reviewed this Annual Report on Form 10-K of Audience, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 9, 2015

 

/s/ Kevin S. Palatnik

Kevin S. Palatnik
Chief Financial Officer (Principal Financial and Accounting Officer)

Exhibit 32.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Peter B. Santos, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of Audience, Inc. on Form 10-K for the fiscal year ended December 31, 2014 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents in all material respects the financial condition and results of operations of Audience, Inc.

Date: March 9, 2015

 

By:

/s/ Peter B. Santos

Name: 

Peter B. Santos

Title:

President, Chief Executive Officer and Director

I, Kevin S. Palatnik, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of Audience, Inc. on Form 10-K for the fiscal year ended December 31, 2014 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents in all material respects the financial condition and results of operations of Audience, Inc.

Date: March 9, 2015

 

By:

/s/ Kevin S. Palatnik

Name:

Kevin S. Palatnik

Title:

Chief Financial Officer


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